Why a secured business investment loan could be the answer

As costs rise for homeowners, so too do they for small business owners and a second-charge could offer a solution.

We are used to hearing about how a second charge can help homeowners consolidate debt or raise funds for home improvements, but how can they help business owners?

A homeowner may not have thought about using the equity in their property to help their business grow, but this type of loan could work out cheaper than other forms of finance, such as a personal or commercial loan.

A homeowner may be looking to raise additional capital to expand their business through the purchase of new equipment, for example, such as a company vehicle, office equipment, machinery or new premises. In the same way as homeowners may have once turned to their savings to fund additional costs, business owners may also find their cash reserves are running low due to increasing costs.

The Federation of Small Businesses’ (FSB) Q3 Index recently shone a light on some of the struggles small business owners are facing. Over half of small firms rate the availability and affordability of new credit as poor, up from one in three at the start of 2022.

On a sectoral basis, the report reveals construction businesses were most likely to apply for credit in Q3, with this being the case for 23.7%. The lowest share, at 10.5%, was seen in both manufacturing and professional, scientific and technical services.

Its findings show the number of small businesses applying for credit rose to 12.6% in Q3 2022, up from 11.5% in Q2 2022. Within that 12.6%, 42.1% were unsuccessful in their application. Of those that were successful, over 20% were offered an interest rate of over 11% for finance, with the average interest rate offered rising from 5.5% in Q2 to 7.1% in Q3.

This is against a backdrop of 85.4% of small businesses reporting an increase in operating costs in Q3.

Despite this, 47% of small businesses still have a desire to grow over the next twelve months.

Some small business owners, just like homeowners, may have built up debt during the pandemic and seen the rate on their loans increase in line with the recent Bank of England interest rate rises. This, alongside the steep increase in energy costs, means some businesses will have less disposable income or funds to spend on new equipment.

While a second charge will not be suitable for all business owners, a lender can look at a borrower’s personal and business finances and work with them to see if it could offer an affordable solution.

Alternatively, the homeowner could be self-employed and struggling to find finance not for business purposes but for personal use, such as for a car or home improvements, but finding their employment status is acting as a hindrance. This might particularly be the case if the borrower has some form of bad credit, which has impacted their credit score.

Recent research from Mortgage Broker Tools painted a bleak picture of mortgage affordability for self-employed borrowers. It found that only 65% of self-employed mortgage enquiries were considered affordable at the end of 2022 – the lowest level since it started recording the data in 2020 and down from 75% in April 2022.

Tools such as Open Banking and a manual approach to a borrower’s individual financial situation, may mean a second charge is an option – even for those with some historical bad credit.

So, whether your client is looking to upscale their business or is a self-employed borrower just needing to raise additional funds, a second charge loan could be the solution.