The plunging property market will put a number of small businesses at risk, particularly start-ups that often secure finance using the value of their homes, according to Rob Lamers, CEO of Oxford Funding, a subsidiary of Bendigo and Adelaide Bank.
Subdued demand for property may cost businesses vital funding for those that have secured a loan in line with property values. “Now that auction clearance rates have dropped, a property may undergo a revaluation that results in reduced credit,” said Lamers, referring to statistics provided by Real Estate Institute of Victoria.
He said a property previously valued at $1 million would typically attract 80% funding credit, which means the business could borrow $800,000. A revaluation of that property to $900,000 would mean a business could only borrow $720,000—a significant reduction of $80,000.
While a number of business owners, particularly of start-ups, secured finance against their homes with no initial problems, it was not a long-term solution as funding would not grow with the business, Lamers remarked.
“It’s better to have finance secured by your business, not your home, which doesn’t grow to match your business,” he said. “Moreover, the lack of separation between personal and business assets places increased risk and pressure on business owners.”
Lamers advised business owners to consider debtor finance—credit secured against a business’s sales invoices—which “increases as your sales increase,” he said. “By leveraging your debtors’ ledger for funds, you can reinvest in business growth without being restricted by the property market.”