Entrepreneurs and business owners can access a source of low cost working capital by tapping into the equity in their homes.
The Financial Conduct Authority (FCA) is the regulator of the mortgage market in the UK and, through its Mortgage Conduct of Business rules, the FCA tightly controls the extent to which homeowners can release equity from their homes. There is, however, a Business Purpose exemption in these rules which means that the proceeds from a second charge loan on a borrower’s home can be used for commercial purposes and is exempt from the scope of mortgage regulation.
The regulations specify that the amount borrowed must exceed £25,000 and the funds must be destined for a legitimate business.
The lender will require a clear description of the use of the loan proceeds and would typically expect the borrower to be an existing shareholder of the relevant business or be using the loan to acquire an interest in that business.
The business could be a sole trader, partnership or a limited company and it is not required to be profitable. A wide range of purposes are permissible – from expanding an existing business, to investing in new equipment, or making an acquisition. Similarly, funds may be used to buy into a partnership or to buy out the shares of other partners.
It is worth noting that, in raising a mortgage loan granted via the Business Purpose exemption, you will give up ‘consumer’ status in respect of that particular transaction, which means that you will not benefit from the same level of regulatory protection. As such, a lender will probably ask you to sign a declaration which confirms you understand this.
There are two main ways that an entrepreneur could make use of the Business Purpose exemption. The first option involves a customer borrowing in their personal name and then injecting the proceeds into the business as equity or debt.
The second route is an unsecured corporate loan that is granted directly to the business. The corporate loan is collateralised by a personal guarantee from one or more directors and/or shareholders, secured with a second charge over residential property that is owned by those guarantors. This structure may be more tax efficient, depending on the specific circumstances of the relevant parties.
Either of these options can provide a source of low-cost working capital and the option to manage cashflow by rolling up interest payments. Speak to your adviser about how the Business Purpose Exemption could help you to grow your business.
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