Property Backed Finance – Your Full Guide

As business owners, we often find ourselves in a situation where we need business finance but are unsure how we will get it or where to even start.  

Well, this is where the assets you already own come to the rescue. A property-backed loan in South Africa is a great way to free up your equity.  In this full guide, we will walk you through everything you need to know about a property secured loan and whether it’s the right fit to get funding for your business.  

Let’s get started…

What is a property secured loan?

The first thing you need to understand is that a property backed (or property secured) loan is a type of secured loan. Secured finance is a form of borrowing that is secured by assets. This means that the asset is your security, and if the borrower does not pay back the loan, the lender can take the assets as compensation. A property backed loan is secured by the equity in a person's home or commercial property. The borrower then uses their property as collateral to get a business loan or personal loan.  

*Property secured finance can otherwise be referred to as asset-based lending against a property.  

Do I need to own a home for property-backed finance?  

Your property forms the base of property backed finance, it’s what provides security and allowed you to take out the loan in the first place. With any asset, but especially with property secured loans, the property whether residential or commercial needs to be paid in full. Essentially you can’t have a mortgage on the property and take out a loan. 

Is a business loan against property a good idea?

With any loan comes risk, and although a property secured loan carries great risk because it’s backed against your property, it still holds great benefit. It’s one of the most secured loans you can get, and because of that, it holds a much lower interest rate compared to other business loan types. Before we get to the rest of the benefits further down, another added perk is that you can access the value of the property while you continue to occupy it during the term of the loan.  

‍How does property backed finance work?

The application process is pretty simple, and FundingHub can help you compare business loan offers in under 5 minutes. There are a couple of requirements for a property backed loan that differ from other types of business loans.  

If you meet the following criteria you’ll be considered for a property secured loan:  

• Six months trading history  

• An average of R40k+ revenue per month  

• A residential or commercial property (it will need to be paid for in full)

What would I use a property backed loan for?  

Later on, we will have a look at 5 examples of what you’d use a property backed loan for. Here is a sneak peek:

‍What is the repayment structure for a property backed loan?  

Your repayment structure differs from lender to lender, however here are a few examples of the structure when it comes to a loan against your property:  

1. As a term loan, where the borrowed amount is then repaid in equal instalments over a fixed period. Typically, offered as a short-term loan.  

2. As a revolving loan facility where an overdraft facility is provided, and you service the interest portion of monies borrowed every month.  

3. No monthly repayments are 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. 

What are the pros and cons of asset based lending against your property?  

As with any loan, there are benefits and downfalls of using a property backed loan, let’s walk you through a couple of reasons why you should or shouldn’t get this type of secured loan.  

6 Advantages of a property secured loan  

1. Free up cash

You already own the property, which means with ease you can free up cash and improve liquidity. This cash can quickly be used towards increasing your business’s revenue and operations.  

2. Flexible Terms

Essentially because you already own an asset that has a value attached to it, you have more leeway when it comes to the flexibility of the loan. Meaning in most cases you’ll be able to create a defined payment structure based on your needs.  

3. Lower Interest Rates    

The loan is backed by your property,  and with most secured business loans this usually has a lower interest rate compared to other types of loans. Having this collateral reduces the risk for the lender.  

4. Higher value loans 

Secured financing in most cases means the borrower will receive a much higher rand value loan (although always less than the value of the asset).  

5. No restriction on the use of funds 

Although it's required that you own property to qualify for this loan, there is no/little restriction (lender-dependant) on what you can do with the funding once you have it. ‍

6. Free application 

FundingHub will never charge you to make an application - or ever. Our service is free, and if you qualify for a loan against your property in South Africa - we'll help you find it.  

3 Disadvantages of property backed finance  

There are a few cons of property backed loans too:  

1. Your own property is required 

If you are a start-up or small business, you might not own a commercial or residential property that can be used as collateral. So, if you don’t have collateral a secured business loan will not be approved.  

2. Big risk 

If you default on your loan you could lose your property altogether. So, if you are unable to repay a loan, it could mean losing your commercial property and in some cases, it could be your home.  

3. Longer processing time 

Although a property backed loan is easier to secure than an unsecured loan, it still has a longer processing time as lenders will need to cede and evaluate your property.  

What would you use property backed finance for?  

5 examples of when your business may need a property-backed loan:

1. Inventory

Your business can only operate if you have inventory stocked. So you’ll need a property backed loan to order more stock and generate more revenue.  

2. New/temporary staff

Whether it’s seasonal work or you’ve received a big contract but don’t have enough staff on board to get the job done - you’ll need a quick cash injection to bring on new team members.

3. Equipment

You might have been given a tight deadline to complete a project but don’t have the necessary equipment to do so. In this case, you’ll need a loan against your property in order to fund equipment.  

4. Bridging finance

If your business needs short-term funding to cover expenses while you are waiting for funds to come in, a property backed loan is an easy way to free up cash.  

5. Growth Capital

You might need cash to grow your business and pursue new ventures, then you’ll be able to use your property to secure this type of loan  

And that's the rundown...

A property backed loan essentially is an affordable way to get business finance for your small to medium-sized enterprise (SMEs). If you are weighing up whether to take out an unsecured loan vs a secured loan, there are a number of different pros and cons for either. It really depends on your business needs and available collateral. If you want to find out more about which business loan you can qualify for, either contact our team or make use of our business loan marketplace platform to compare offers.

Frequently asked questions about property secured finance

Do I need a good credit score for a secured business loan?

A good credit score is not always necessary for a secured business loan. Whether you qualify for a secured loan or not depends on the total loan value and the value of the asset. With a secured loan against property, if you have a bad credit score you could still qualify for a business loan if your income exceeds the amount you want to borrow and have a fully paid property to put up as collateral. So generally speaking, you don’t need a good credit score for asset based lending.  

Is it easy to get property backed finance for your business?

A property secured loan is backed by your property, which means for a lender you are considered a less risky borrower. For most borrowers, your loan application is much easier, because there is less risk for the lender and they can draw value from your property. There is also less focus on your credit score or credit history. 

What can I use as proof of ownership of a property?  

Your title deed is legal proof that you own a property. The title deed should contain either your business details or personal details. It should also give a full description of the property, address and size. It’s important that your title deed have the correct ownership details so it can be used as collateral against a loan.  

What’s the difference between asset based lending and a property backed loan?

Asset-based lending is a type of secured loan that is used to lend money against the value of an asset. This can be anything from equipment, vehicles, or even jewellery, art and buildings. Property backed finance is also a type of secured loan that is used to lend money but it can only be backed against the value of a property. This can be residential or commercial properties, and it can also include land.  

Essentially, a property backed loan is a type of asset-based landing, the asset in this case always being the property.  

Are property backed loans legal?  

100%, at FundingHub we only use reputable and trusted lenders, and because of this all of our business loans are legal. The lender or bank will calculate the risk by evaluating the property value, your credit history and salary. Secured loans are a legal way of acquiring a business loan. By using your property as collateral, the financial institution can always repossess your property if the loan is not paid back.  

Secured loan vs unsecured loan – what’s the difference?

A secured loan is a type of lending that is backed by an asset, such as a car, debtor’s book or property. The borrower uses the asset as collateral for the loan and if they default on their payments, the lender can take possession of the property and sell it to repay the loan.

An unsecured loan is a type of lending that does not require any collateral from the borrower. The lender will usually charge higher interest rates to compensate for this lack of security.

Can I use my bonded property to get a secured business loan?

The most important element of a property-backed loan in South Africa is that the property must be unbonded, otherwise, it’s not an asset that you own or can leverage. So in short, the answer is no. Unbonded property is mandatory.  

What does property collateral mean?

Property collateral is a type of security that a borrower provides to a lender in order to secure the repayment of a debt. Your property is considered a valuable asset to a lender because it can be sold if the borrower defaults on the loan. The property is offered by the borrower to secure their debt and it must be worth more than the loan.