Turning bricks into business: How homeowners can raise capital with secured loans
Raising the capital that is needed to start or expand a business can be a challenge for many entrepreneurs. Traditional loans may come with high interest rates or require a lengthy approval process. But if you own property, you might already be sitting on a valuable resource: your home. Secured loans make it possible to leverage the equity in your property, and put it towards funding your business goals.
In this post, we’ll explore how homeowners can turn their real estate “bricks” into real business opportunities using secured loans, and what to consider before making the leap.
What is a secured loan?
Secured loans are often referred to as homeowner loans, second charge mortgages, or simply equity release loans in the UK. A secured loan is a loan that is backed by an asset, typically real estate or a vehicle. In the context of homeownership, this usually means borrowing money against the equity in your home.
Equity is the difference between your home’s market value and any outstanding mortgage balance. For example, if your home is worth £300,000 and you owe £200,000 on your mortgage, you have £100,000 in equity.
With a secured loan, you might be able to borrow a portion of that amount, depending on your lender’s terms.
Why use a secured loan to fund a business?
There are many reasons as to why a homeowner may choose to go with a secured loan over other financing options when they are starting or growing a business.
1. Lower interest rates
Typically, a secured loan will offer lower interest rates than unsecured personal or business loans. The reason for this is that the risk to the lender is significantly reduced. Your property acts as collateral, and this provides security for the lender in the case of default.
2. Larger loan amounts
Because they’re backed by property, secured loans usually allow borrowers to access larger sums. This makes them perfect for entrepreneurs who are looking to cover significant startup or expansion costs.
3. Flexible repayment terms
The standard repayment periods for secured loans can range from 5 to 25 years, allowing borrowers to spread repayments over a manageable timeline. This flexibility can ease cash flow pressures during the early stages of business growth.
4. Credit accessibility
Even if you have a less-than-perfect credit score, you might still be eligible for a secured loan. The presence of collateral often makes lenders more willing to lend to applicants with limited credit history or past financial hiccups.
How homeowners can use secured loans for business purposes
Here are a few common ways homeowners use secured loans to launch or support a business:
- Startup capital: Purchase equipment, inventory, or marketing services.
- Business expansion: Open a new location, hire staff, or develop a new product line.
- Cash flow support: Bridge temporary gaps in cash flow, especially in seasonal businesses.
- Debt consolidation: Refinance existing high-interest business debts into one lower monthly payment.
It’s essential, however, to separate business risk from personal risk. While a secured loan offers access to capital, it also puts your home on the line. Therefore, you need a solid business plan and financial strategy in place before proceeding.
Steps to take before applying for a secured loan
1. Assess your equity
Start by calculating how much equity you have in your home. Lenders usually allow you to borrow up to 70-85% of your home’s value, including your existing mortgage.
2. Check your credit score
Although secured loans are more accessible, your credit profile still influences the interest rate and terms you’ll be offered. Obtain your credit report and resolve any discrepancies or outstanding issues before applying.
3. Build a strong business plan
A well-thought-out business plan will help you determine how much funding you need and how it will be used. It should include projected revenue, cash flow forecasts, and an outline of your marketing and operations strategies.
4. Compare lenders
Not all secured loan providers are created equal. Shop around for competitive rates, favourable terms, and clear repayment conditions. Be wary of hidden fees or early repayment penalties.
5. Consult a financial advisor
It’s wise to speak with a financial advisor or mortgage broker who can provide personalised advice that is based on your specific circumstances. They can help you evaluate the risks and ensure that using your home to fund a business is a sound decision.
Risks and considerations
While secured loans can be a smart way to raise business capital, they come with serious risks. Most importantly, your home is used as collateral, meaning if your business struggles and you can’t keep up with repayments, you could lose your property.
These loans often run for many years, so even if your business changes direction or closes, you’re still responsible for repaying the debt. If the loan has a variable interest rate, repayments could rise over time, straining your budget. It’s vital to plan for both current affordability and future changes.
Borrowing against your home also reduces your equity. If house prices fall, you could end up owing more than your property is worth, making it harder to sell or refinance in the future. It may also affect your ability to secure further credit later on.
In short, secured loans can unlock exciting opportunities, but they’re not to be taken lightly. A combination of careful planning and a realistic business strategy are essential before moving forward.
Alternatives to secured loans
Before committing, consider whether a secured loan is the best route. Here are some alternatives:
- Unsecured business loans: No collateral required, but higher interest rates and lower borrowing limits.
- Personal savings or investments: Lower financial risk to your home but might not offer sufficient capital.
- Angel investors or venture capital: No repayment obligation, but you may give up equity or control.
- Government-backed loans and grants: Programs like the UK Start Up Loans scheme offer low-interest loans and mentoring to new entrepreneurs.
Final thoughts
Using your home to fund a business venture can be a powerful way to transform existing wealth into new income streams. But it comes with serious responsibilities. A secured loan should be viewed not as “easy money” but as a strategic financial tool, and potentially one that can yield excellent results when used wisely and with careful planning.
If you’re confident in your business idea, have a realistic financial forecast, and understand the risks involved, tapping into your home equity could be the launchpad your entrepreneurial journey needs.
Just remember: the bricks that build your home can also build your future, but only if the foundation is solid.