When Is It Right For A Business Owner To Borrow Against Their Own Home?
Starbucks founders Jerry Baldwin, Zev Siegel and Gordon Bowker famously built their $79 billion dollar coffee empire on the back of taking out a small loan, so when is the right time as CEO to take out a loan to grow your business?
As a business owner, there are plenty of big decisions to make, such as how much to pay your employees, how much to pay yourself, and what level of risk to take to ensure a successful strategy. But by far the most important is what level of personal finance are you willing to invest into your business?
For most business owners, getting the right level of finance and investment is key in ensuring market success. Business startups often only happen because of the ability of the business owner to back it up with their own money. So, when is it right to borrow against your own home to ensure the business succeeds?
A surprising trait of a strong CEO
Studies have shown that strong CEOs closely align their own finances with their business. While it might be counter-intuitive to think that a strong business might not need to rely on the financial status of its CEO, there are good reasons for this not being the case.
A CEO can exert their will and personality on the company when there are higher levels of personal wealth at stake, making company direction and decision-making much stronger and clearer. This strategy allows business owners to put into practice their own preferences for financial decision-making.
Do personal finances affect a business?
Most business owners already know that personal finance affects their business. Lenders will look at the business owner’s credit scores and examine their finances prior to investing or agreeing on credit facilities. The performance of previously owned businesses will also be taken into consideration, as will levels of personal debt. This realisation is often a trigger for business owners to consider using their own sources of equity to fund their business.
How to borrow against your home
There could be thousands of pounds locked up in your own home, and there are two ways in which you can unlock this equity for the benefit of your business.
The first is to agree a secured loan against your property, which is separate to your mortgage, and use this finance for your business. The benefit of this is that you can use the money as you see fit, but there are downsides to it as well. Chief among them is having a separate charge against your home, which might make remortgaging more difficult.
The second way is to use the equity in your home to remortgage your house with either your existing lender or through a new one. This can be done in a number of ways, with sites such as Trussle helping homeowners to find the best fixed rate remortgage deals to secure a mortgage that locks in rates for a set period of time. Remortgaging is often one of the cheapest sources of generating funding due to the relatively low-interest rates available.
Benefits of using personal finance for business development
For a business owner, lending money or investing it into their own business works like a cash boost facility similar to a business loan, but allows you to stay firmly in control of the company finances.
For most small businesses or startups, ensuring strong financial control is critical to long-term success. A business owner who wants to ensure strong leadership should nearly always lead from the front in terms of strategy, personality and financial backing. Many of the most successful CEOs in business have a relatively high level of personal investment tied into their business and it enables them to steer their business on the right course.
Of course, if external investment is available, it should be taken, but lenders are often reticent about doing so, and investors often ask for a level of input, wrestling control away from the business owner. By using personal finance to help fund a business, it ensures continuity of leadership.