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If you need a large business loan but want to limit your personal liability, a non-recourse business loan might be worth considering.
It’s designed to protect your personal assets such as your home or any residential investment properties you may own in case you default on your business loan.
While it sounds like a great option, getting approved can be difficult and it can come with a large interest rate.
Non-recourse business loans: the facts
A non-recourse loan may be a viable finance solution if your business is making good turnover and you want to take the next step in expanding your operations.
While you don’t need to provide a director’s guarantee, you will need to have strong cash flow and show evidence that you can financially meet the business loan repayments.
What's the approval process?
Although terms and interest rates are quite negotiable in the business loan space, here are a few tips to keep in mind before you consider going down the non-recourse path.
Are you borrowing a significant amount?
As a general rule, non-recourse business loans are only available for businesses with a value of $15 million or more.
First way out
Most lenders have an approach of “first way out” and “second way out”.
The first way out is when lenders take into consideration the cash flow in the business and your debt-service coverage ratio (DSCR).
DSCR is essentially how many times you can cover the principal debt and interest based on your annual income.
Your cash flow and DSCR essentially gives the bank something to “hang their hat on” in lieu of residential property so it has to be quite strong.
Specifically, most lenders will want to see DSCR and interest coverage ratio (ICR) of >5x.
Second way out
If you’re intending to buy a commercial property or use the commercial property that you’re currently using for your business premises as security, it can actually help to support and even sweeten your business case with the bank.
When it comes to second way out, banks will take a general security agreement (GSA) over the security which covers all fixed and floating assets.
It’s important to be aware that most lenders will only accept standard commercial properties like retail space, factories, and residential developments.
Further security may be required
In some cases, the lender may take security over the value of the inventory in your business as another tangible asset in the event that your cash flow isn’t strong enough.
They may enforce some level of debt reduction, that is, the debt will have to be paid down (say 10%) to a certain amount in a given time period (such as 1 year).
In addition, the bank may limit the amount that directors can take from the profits of the business, essentially reducing your personal income.
That’s why it’s essential that when it comes to large business loans, particularly non-recourse lending, you seek out independent financial advice before making a decision that could affect you or your business financially.
We can let you know if you qualify!
Simply fill in our free assessment form and let us know what type of finance you need for your business and we can let you know if a non-recourse business loan is right for you.
The benefits
You won’t need to provide a Director’s Guarantee, which is usually a compulsory requirement and needs to be waived as a special request by the bank’s credit manager.
If the sale of your business and its assets (including the property and equipment) isn’t enough to cover the remaining debt for whatever reason, the banks are not allowed to sell your other assets, such as your home or residential investment property, to cover the debt.
You can also qualify for the same terms of a standard business loan terms including 5, 10, 15 and 25-year terms.
The cons
- Non-recourse business loans are generally only available to strong applicants who can provide strong business financials.Typically, they are only available to businesses with a value of upwards of $15 million.
- You will be charged a much higher commercial interest rate than a standard business loan.
Are there are other solutions?
A business loan with a guarantor is a popular alternative for business owners looking to reduce their personal liability.
The benefit of a guarantor loan is that you can get the business finance you need a lot faster and take advantage of commercial interest rates that are lower than the rates offered on non-recourse business loans.
Do you want a non-recourse business loan?
Please call us on 1300 889 743 or complete our free assessment form to speak with one of our mortgage brokers to find out if you qualify for a non-recourse business loan.