Entrepreneurs are usually driven to build new businesses by a passion for a certain industry, but the main purpose of a business is to provide income and to serve as an investment that can be later sold to earn profits. Equity is an essential concept in personal and business finance that explains the ownership interest that a person has in an asset.
Understanding Equity Release
Equity release refers to the process of releasing cash through the property you own without having to move out of it. You can release equity in two ways – lifetime mortgage and home reversion.
Using Equity Release for Business
As an owner of a business, you would always be looking for ways to leverage your assets to develop your business.
Equity release permits active shareholders to extract certain value within the business without losing any controlling interest. This may be done for various reasons like:
- The satisfaction of financial reward after years of thriving
- The reduction of exposure of shareholders to risk some of the company’s value
- A desire of one or more shareholders for retirement that is not shared by everyone
Remaining the Controller of the Company
Staying in overall control of the company is the major problem for existing shareholders in such conditions.
A solution to the problem is usually found when a private equity company buys a minority stake in the business. Existing shareholders keep hold of the majority vote and remain in control when strategic decisions are made of asset-based lending or bank borrowing-cash flow in order to enable a lump sum withdrawal.
Diminishing the Exposure to Risk
Equity release is likely to be sought by shareholders attempting to diminish their exposure to risk. However, it is not only the insertion of cash, which is prominent. Some funders will get with them their complementary ideas and skills to add value to the venture, and it is imperative that the service of the funding can be done without the need of compromising plans for the future growth of the business.
In fact, if there is any doubt regarding a business’s ability to service equity release or of the outstanding motivation or capability of the shareholders to maintain the position of the company, it is unlikely that the suitable providers would be interested in placing an investment.
A succession of the venture
Equity release would be an obvious solution if a shareholder, who is working in the business, is approaching retirement and wishes for access to the monetary value they had been helpful in building up. This kind of funding may also offer an incentive to the subsequent generation in case a family runs the business.
Equity in Business Property
Residential property investors generally release equity in their houses to invest in another property. Similarly, you can utilise the equity in your commercial property.
Banks are more risk indisposed to commercial property funding as compared to the residential market. Moreover, they will wish to have a certain amount of control over the utilisation of funds ahead of releasing equity to you.
Unluckily, the private lenders and non-bank lenders are just as unwilling to cash-out facilities against the commercial property. This is mostly because these facilities do not guarantee the needed return to investors.
You may also like to read: “4 Ways a Home Equity Loan Could Benefit Your Finances”
Ways in which you can release your Business-Related Equity
In case you have equity in your commercial property and you wish to invest further, there are two ways to release this equity:
#1: Re-draw Facilities
In case, you are seeking to expand your commercial properties’ portfolio, the access to funds is as prominent as costs and interest rates. You may request a facility with some kind of re-draw available. This permits you to pay down a loan and later draw on it again up to your own limit.
In case your lender or bank does not provide that facility, you might require re-financing to a provider that is more flexible.
A bank will commonly require some kind of evidence of the purpose prior to the release of funds. However, the level of information required differs from one bank to another.
#2: Lines of Credit
Does your investment need easy access to credit? If yes, then you may consider a funder that permits a line of credit facility that is secured by a commercial property. There are very few in the market and using them means paying a higher rate on the debt.
When you are considering the most suitable loan product, you must look at the utilisation of funds and the profit potential through the use of this cash. Compare the cost of leaving the cash idle with this.
Managing Your Relationship with the Bank
Usually, banks are less flexible when it comes to the allowance of the use of equity in case of a commercial property. Nonetheless, if your commercial property loan is currently with a major bank, then make sure that you maintain a strong relationship with the banker.
Although many changes have taken place in the last decade in the mortgage sector, business banks still run in the same way as earlier – on the basis of relationships and individual decision-makers.
If your loan of commercial property is with a bank, it is necessary to maintain a good relationship with the banker and ensure that your loan is in a good position. This is because you will stand a better chance of being assisted in case you ever wish to invest further.
While many banks would allow redrawing facilities on specific products, it is usually subject to sign off from the banker.