Answers

Q: I need to take out a bank loan to fund my franchise, but I'm concerned about securing my loan as a homeowner. I'm worried that if my venture fails and I cannot meet the repayments on my loan, my house may be repossessed. Do you think that this is the best option, or are there other forms of security that my bank will accept? Or can they offer me an unsecured loan?

Cathryn Hayes: You are right to give serious thought to the risks involved before offering your home as security for a loan. If your venture fails and you are unable to service the loan from alternative sources of income, your home could be at risk.
Lenders consider each loan application individually and if your case is strong enough, they may consider offering the finance on an unsecured basis. However, in most instances, the lender will look for some form of security which will provide a secondary source of repayment should the business fail to generate enough cash flow to repay the loan as planned.
Alternative forms of security may include: Personal guarantees; assignment of the benefits of life policies; the lodgement of share certificates; and charges over other properties.
Lenders will assess the pros and cons of alternative types of security against the following criteria:

Marketability - is there a ready market for this type of asset?
Assessability - is it easy to assess the value of the asset?
Stability - how stable is the asset's value?
Transferability - how easy is it to gain rights to an asset before it can be sold?

A domestic property scores highly against most of the above criteria and is often the only significant asset an applicant can offer as security. If you are prepared to offer your home, you reduce the lenders risk and are likely to be offered a better interest rate.
All lenders try to balance the risks and the rewards of individual loan applications. If your business case is strong enough, the lender may be prepared to accept little or no security, but in recompense you may expect to pay a higher rate of interest.
Your bank's franchise unit will be able to introduce you to a local commercial manager, so you can discuss your options early.