Small business owners deciding between business loans and property loans have plenty of pros and cons to consider. Business loans come with less risk in case of default than property loans, but this is offset by your business potentially facing higher interest rates. On the other hand, property loans come with higher risk but reduced interest rates. To help you determine the better option, let us first identify the kind of security you are willing to provide and your ability to repay your loan.
Understanding The Main Differences Between Business Loans and Property Loans
Business loans are a fixed amount of capital provided in return for monthly payments with interest. Business loans can have variable or fixed interest rates and either be secured or unsecured. The loan amount a business can qualify for will be based on several factors, such as its age, annual revenue, and more. Moreover, business loan types vary, which can impact the borrower’s eligibility and how their payments are calculated.
In contrast, property-backed loans or home equity loans in Singapore depend on the value built into the home or property, otherwise known as equity. Lenders use this equity as security, resulting in a much lower interest rate for the loan. Of course, by providing one’s property as collateral, the loan comes with an inherent risk一defaulting entails potentially losing the home. Lenders calculate home equity by taking the current value of a property minus the outstanding mortgage balance. Moreover, the interest rate is determined by the borrower’s personal credit history and other related factors that gauge their ability to pay off the loan.
Business Loans vs Property Loans: A Quick Rundown of The Benefits And Drawbacks
- Competitive interest rates compared to revolving credit such as business credit cards. A typical SME working ranges around 4-6% per annum, while an unsecured business term loan is around 9-12% per annum.
- Plenty of options to choose from depending on the needs of your business, from loans backed by equipment to lines of credit and everything else in between.
- Extensive application process will require business owners to submit various documents for their loan application, which may take a couple of weeks to a month to process and fund the loan.
- Strict requirements mean a given lender’s qualifications for loan approval, typically looking at the business’s standing, its credit score, the owner’s personal credit score, and more.
- Tax-deductible interest or interest paid on the property can be tax-deductible.
- Access to greater capital depends on the home’s value, not the business’s. Property loans, on average, allow borrowers to loan up to 80% of their home value.
- Lower interest rates due to the loan being secured by an asset as valuable as a home or property.
- Predictable payment terms thanks to fixed interest rates. Most home equity loans have fixed interest, making it simpler to make monthly payments without worrying about market fluctuations.
- Home value affects equity, so if your property declines in value, you may lose the available equity and have to refinance.
- Long repayment terms of up to 20 years, which costs more over time due to interest.
- Possibility of foreclosure if you default on your loan, as the lender may sell your property to repay the debt.
Which Option Is Better For You?
Business loans and property loans are two of many financing options that small business owners can choose from to fund their businesses. Deciding on one or the other should come down to which offers more benefits for you. Business loans are generally suited for businesses that have:
- Several years of business experience
- Decent business and personal scores
- A need to build business credit
On the other hand, property loans are far more ideal for business owners who:
- Own property but have difficulty or do not qualify for traditional business loans
- Would like to maximise the value of their home for a one large expense
- Are interested in starting a business and need a fixed yet significant amount of capital
If you have decided that property loans are the best for your business, OxProp Capital offers the most reliable property loans to finance your business! Our trusted and innovative financial solutions, such as home equity loans and property mortgage loans in Singapore, provide clients with the financing support to grow and prosper. Drop us a line today and let us work together to achieve the success you seek!