What is secured finance like Property-Backed Loans?
A property-backed loan is a type of secured loan where the property is used as security. This is ideal for a business with a temporary cash-flow shortage that wants to take a loan against property. It allows you to free up the equity locked up in un-bonded property to secure fast and flexible credit.
The loan facility can be structured in a few ways depending on the lender’s product offering. Some examples include:
1. As a term loan, where the borrowed amount is then repaid in equal installments over a fixed period of time
2. As a revolving loan facility where an overdraft facility is provided and you service the interest portion of monies borrowed on a monthly basis
3. No monthly repayments required because interest and capital are repaid together at the end of the term. This structure is very attractive if you are working on a deal which only receives payment on conclusion.
Funding Amounts
Property backed loans generally range from R100 000 minimum to a maximum of R50 000 000.
Repayment Structure
The repayment structure of a property backed loan depends on the specific contract. It is one of two options:
- Normal loan amortisation structure with a combined monthly interest and capital repayment which happens monthly, or
- A balloon-payment that is paid at the end of the contract to cover the capital repayment.
Costs
These are generally lower-risk loans in the small business space, and so are cheaper than unsecured loans.
More details about costs are here.
Do you qualify?
Through FundingHub, you are likely to qualify for a property-backed loan if your business meets the following criteria:
- 12 months trading history,
- An average of R60k+ revenue per month,
- You (as a director), or your business, owns an un-bonded property that can be used as security.
* Figures are for example purposes only, and may vary from business to business.
How Does a Property-Backed Loan Work?
A property backed loan is a medium to long-term loan that uses a fixed repayment period.
To qualify, you need to have a form of security to offer the lender, in return for them lending your business money.
That security is in the form of a building or piece of land that you or your business owns.
You then use that land as a form of collateral, so that should you default on your loan repayments repeatedly, and the loan goes into delinquency, the bank or lender has some recourse and can then sell that property to recoup the costs of the loan.
How Much Does a Property Backed Loan Cost?
An property backed loan's interest rate can range from prime interest rate (currently 7,5%) through to prime + 10%.
If the loan is getting any more expensive than that, you may want to reconsider your lender, or options.
A typical property-backed loan repayment and cost example:
A business loans R2 000 000 for 24 months. It is to execute on a large contract that they have won, which they do not have the cash flow to deliver upon.
They are an established business, with a property worth R10 000 000, fully owned by the business.
The business decides to take out a property-backed loan.
Their annual interest rate is prime plus 7.5%, which = 15%. This equates to a monthly interest rate of 1.25% per month.
The lender and the business decide that a balloon payment loan structure is beneficial, due to the contract nature of the work.
The monthly repayment schedule may look something like this:
Month
Interest Repayment
Capital Repayment
Loan Balance
1
R25 000
R0
R2 000 000
2
R25 000
R0
R2 000 000
...
...
...
...
23
R25 000
R0
R2 000 000
24
R25 000
R2 000 000
R0
* Figures are for example purposes only, and may vary from business to business.
Factors that affect the cost of a property-backed loan:
The cost of the loan depends on a number of factors. These include:
- Monthly turnover: How much you make every month.
- How long you've been in business: Generally, 1 year minimum is required.
- The value of the asset: If it is a more valuable asset, the finance might be cheaper.
- The type of asset: If it is a commercial property that is hard to liquidate, the lender may view this as a potential risk, and make the finance more expensive.
- Credit score: This plays a little role in the credit decision. Some lenders may consider a credit score, but most are satisfied if your property is of sufficient value.
- Lender: Some lenders are primarily focused on speed of funding. This means they will take more risk, and accept less documentation in the application so that it gets processed fast. However, this normally means the loan is slightly more expensive.
In general, a good rule of thumb when it comes to pricing: The more risk the lender takes on, the more expensive the loan will be. That is why an unsecured loan is more expensive than a property-backed, secured loan.
This is the reason why a property-backed loan process is slightly longer than an unsecured loan.
Ballon Payments
Always look at the fine-print on your loan contract.
Some lenders may make the monthly instalments low - and therefore the loan seems more affordable - but then lump on a balloon payment at the end of the contract.
This is generally in the situation where the reason for the loan is to execute on a contract or something similar where the loan amount will be redeemable.
It makes the monthly repayments very low. They are usually only comprised of interest and fee's.
Uses for a Property Backed Loan
Anything you'd like.
It's very seldom that a lender stipulates your use of funds.
One thing to bare in mind though, is that it your use of funds is one of the factors that a lender might consider in your loan application.
As an example, if you are using a secured property-backed loan to buy an an asset, the lender may consider how that asset will contribute or detract from your ability to repay the secured loan
In that case, the lender is going to factor in your use of funds as a consideration when deciding how much to loan, and how much it is going to cost.
Common Secured Loan Uses
Here is a list of some of the common reasons an SME business may want to use an property-backed loan:
- Growth capital: Cash to grow your business through new ventures, or increased investment spend.
- Upgrading business premises: Use the loan to upgrade your facilities or property.
- Buying new business premises.
- New business venture.
- Acquiring another business.
Document Requirements
Due to the nature of a property-backed loan involving more collateral than an unsecured loan, there is more paperwork involved.
Here is a list of the documents usually required for a property-backed loan application:
- ID Documents/Registration documents of the entity or individual who owns the property,
- The original property deed,
- Current business bank statements (6-12 months),
- Latest set of management accounts,
- Latest set of annual financial statements.
There may be more documents required, but this is a good base to work from.
How Does the Application Process Work?
We've designed our property backed loan application process to be as fast as and easy as possible.
We only collect the most important information, and keep you informed on what you need to provide to maximise your application profile and get your best offers.
Step 1: Apply through FundingHub
One application form will mean we find and match offers for you from a suite of over 40 different lenders, from banks to alternative financers.
It's fast, and free, and fully online.
Step 2: Add Information and Documents
FundingHub allows you to pause an application, and finish at a later stage. We guide you through the different document requirements, and which lenders need what information.
Step 3: View Your Offers
When you've provided the necessary information, you'll be able to easily see the matches that we've found for your application.
Step 4: Choose an Offer
All the specifics around, pricing, fee's, speed of funds and the different lenders is laid out for you. If you have questions, we've got an independent analyst who can help you choose the right offer.
Step 5: Finalise Application with Lender
When you choose your best offer, your information will be automatically sent to the lender. No hassle for you, and no repeated application forms.
You'll finalise details around pricing and repayment directly with the lender, and we'll be here to give you alternate options, or helpful advice and information, along the way.
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