Unlocking Capital: Understanding Equity Release Loans for SMEs

What is an Equity Release Loan?

An equity release loan, also known as equity financing or cash out, involves leveraging the equity built up in a property or asset to secure a loan. This equity can be in the form of real estate, equipment, or even intellectual property.

Essentially, the borrower receives finance based on the appraised value of the asset being used as collateral. When using a private lender, equity release loans do not necessarily require regular repayments of principal and interest like traditional bank loans. Instead, repayment typically occurs when the asset is sold or through other terms depending on the exit strategy that was agreed upon.

Advantages for Small Businesses:

Flexible Repayment Terms: Unlike traditional loans with fixed repayment schedules, equity release loans often offer flexible repayment terms. Repayment is typically tied to an agreed exit strategy or the eventual sale of the asset, allowing for greater adaptability to the unique financial situation of the borrower.

Retain Ownership and Control: Unlike equity financing through selling shares or equity stakes in the company, equity release loans enable businesses to retain full ownership and control. This means that business owners can make strategic decisions independently without interference from external stakeholders.

Unlock Hidden Value of a Business: For businesses that have significant equity tied up in assets such as real estate or equipment, equity release allows them to unlock this value and put it to work. This capital injection can be instrumental in funding expansion projects, launching new product lines, or investing in upgrades if needed.

Case Study: How PMA helped an Experienced Property Developer with an Equity Release Loan

Equity Release Loans are among the finance products PMA provides. One of PMA’s clients is a property developer who needed funding to reimburse a director’s loan used towards development projects in Sydney.

This client has over 25 years of experience in construction. Moreover, they have completed around $20 Million in projects over the past few years.

However, like many property development projects, cash is usually held up until the completion of the project.

Despite the extensive and proven history of the borrower, securing bank finance has always been a challenge because traditional finance institutions typically require a steady monthly income to be demonstrated when assessing the viability of the loan.

So how did an equity release loan from PMA become a practical funding solution in this instance?

The borrower owned a property in Tennyson Point, NSW. It was on a 1,617msq of land, with five bedrooms, three bathrooms, and 4-vehicle carport.

An equity release loan allowed them to tap into the value of their property to gain the liquidity needed to cover the reimbursement of their director loan.

Their exit strategy was to repay the equity release loan from the sale of their newly built apartments from their development projects.

Based on this strong exit strategy, PMA was able to provide the funding they needed within 3 weeks.

Details:

• Loan Amount: $2,925,000 (First Mortgage)
• Term: 6 months prepaid plus 9 monthly extensions
• Broker Commission: Referrer Fee 0.50% + GST = $14,625 + GST *with no clawbacks.

Based on this example, we’ve shown an actual scenario when an equity release loan offered a small business a fast and flexible financing solution by leveraging the equity in their property to unlock additional funds.

For more information on the other finance solutions PMA provides, be sure to visit our product page.

If you have a business lending scenario you would like to discuss, or, if you have queries on any of PMA’s commercial finance products, feel free to contact us or you can complete our Quick App form here (< 10 mins).