Pros and cons of equity release for small business owners

Is equity release right for your small business?

Written in line with our editorial policy.

If you are aged 55+ and need some cash to start a new business, or to fund an existing business, is equity release a viable option? We take a look at how equity release for small business owners works, and the pros and cons of this potential source of funding.

There are of course many ways that you may be able to raise funds for a new or existing business. But when no viable alternatives are available, equity release could be the answer. As well as raising funds for your own business, it may also be a way to provide start-up capital for your children or grandchildren.

So let’s explore some essential information about the viability of equity release for small business funding:

• How does equity release work?
• How can equity release be used for small business funding?
• Pros and cons of equity release for small businesses.

We hope this article will help you understand the issues around equity release and small business funding. Our selected equity release advisers are also available to discuss your circumstances and offer further information and advice.

Just call us on 0808 178 3055 or request a call back and we’ll arrange a no-obligation appointment for you. Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could unlock.

How does equity release work?

Equity release enables eligible homeowners aged 55+ to unlock some of the value from their homes. This is most often done via a form of a tax-free secured loan known as a lifetime mortgage.

There are no mandatory monthly loan repayments with a lifetime mortgage. Instead, the loan and accrued interest is repaid through the sale of your home when you pass away or move into long-term care. Until then, you continue to own your home and have the right to live there.

How can equity release be used for small business funding?

Equity release is very flexible in terms of how you use the money you release. Once you have paid off any existing mortgage or other debts secured against your property, you are free to use the money for just about any legal purpose. This can include starting a new business, or injecting some much-needed funding into an existing business, such as:

• Investing in premises, plant or machinery.
• Purchasing stock to take advantage of sales potential.
• Expanding your marketing programme.
• Improving cash flow.

You have the option of taking all your cash in one go with a lump sum lifetime mortgage, or taking it as and when you need it with a drawdown lifetime mortgage.  

Having no mandatory loan or interest repayments to worry about may be important if you need time to grow the business without the burden of repayments. But you do have the option of making interest payments if you wish with an interest-only lifetime mortgage.   

Other options may work out cheaper in the long run, but if you are unwilling or unable to take on monthly repayments, equity release may make more sense. However, please make sure that you fully understand the overall cost of equity release, including the effect it could have on any inheritance you leave. 

We suggest you talk to one of our selected equity release advisers. They will discuss your circumstances and provide specialist advice on the potential suitability of equity release compared to alternative sources of small business funding. Call us on 0808 178 3055 or request a call back and we can arrange a no-obligation appointment with an adviser.

Pros and cons of equity release for small businesses

Here is a brief rundown of some of the main pros and cons of equity release for small business owners. The list is not exhaustive however, and we therefore recommend getting professional advice before deciding on the suitability of equity release for your business funding. 

Pros of equity release for a small business

• You can release tax-free cash with no need to create a business plan, which might be required with conventional business lending.
• There is no requirement to make any repayments of the loan or interest in your lifetime – but you do have that option.
• You are able to pay off the loan early, subject to early repayment charges.
• If your property benefits from future house price increases, you may be able to apply for further releases.
• The loan may enable you to keep your business running when other forms of funding are not available.
• You will be protected by the Equity Release Council’s ‘no-negative equity guarantee’ which means you or your beneficiaries will never owe more than the value of your home.

Cons of equity release for a small business

• Interest rates might be higher than other forms of lending.
• The amount owed builds up significantly due to the effect of compound interest.
• You won’t be able to take out other types of loan secured against your property once your equity release plan is in place.
• There are fees and charges with equity release that might not apply with other forms of lending.
• There may be early repayment fees to consider if you wish to repay the loan plus interest early, although some lenders waive these in some circumstances.
• Equity release is likely to reduce the value of your estate and the amount of inheritance you can leave to your family.

Read more: Pros and cons of equity release

Talk to a specialist equity release adviser

Equity Release Wise’s selected advisers will help you decide if a lifetime mortgage is suitable as a way to generate cash for your small business. They can also obtain quotes from leading equity release providers, looking for a mix of the best available rates and the product features you may need.

Please call 0808 178 3055 or request a free call back here. Our friendly team will be able to answer your initial questions and put you through to one of our selected advisers to help you further.