Can a Business Owner Obtain a Loan After Investing Equity from Their House?
If you've used the equity from your house to buy a stake in a business, you may wonder if you can obtain a business loan. The answer depends on a variety of factors, including the terms of the business agreement and the specifics of the loan application process.
Eligibility for Business Loans as a Co-Owner
Yes, as a co-owner of the business, you should be able to apply for a business loan in the company's name. The eligibility for such loans typically depends on the financial health and profitability of the business, as well as the credit history of both the business and the individual owners.
Lenders, including platforms like Indifi, often consider the business's performance, cash flow, and sometimes require personal guarantees or collateral. These factors are crucial in determining whether a loan can be issued.
Business Operating Agreements and Loan Restrictions
A business operating agreement usually specifies which member or owner is authorized to borrow money on behalf of the company. As a 40% owner, it is highly unlikely that you would be permitted to obtain a business loan without the consent of the other owners.
Furthermore, it is generally not advisable to use a personal equity loan to buy a business stake and then use the funds from a business loan to repay it. The loan documents typically explicitly prohibit the use of loan proceeds for business funding.
Personal Guarantees and Financing Risks
Virtually all business loans require a personal guarantee. This means pledging personal assets as collateral for the loan. If your home is already pledged, you cannot seek further financing through this method.
Review the loan agreement for your equity loan in detail. It is likely to contain provisions that prohibit the use of borrowed funds for business purposes. If the lender discovers that you have violated these terms, they could demand immediate repayment and, if you cannot pay, may liquidate the collateral… including your house.
To avoid such financial risks, it is advisable to pay off any equity loans as quickly as possible.
Conclusion
As a co-owner of a business, you can apply for a business loan, but the process is dependent on several factors. Ensure that you understand the terms and conditions of both your equity loan and the proposed business loan, and follow the advice of financial experts to avoid potential conflicts and financial risks.