use mortgage to fund new business

homedad

We are looking to buy a franchise and have access to £40k to fund this, but will need another £40-50 k working capital.
I have approached the mortgage provider to see if they will increase the limit on our agreed facility (we have an offset mortgage) for the "home improvements" and they have agreed to do this. This will cover what we need, but one point made in the agreement is that the funds musnt be used in a business or to fund one.

So do we take the money and say nothing? and what are the consequences if we do?
What are the chances of them actually checking up on what we do with the money? As long as the interest is paid are they happy to leave us alone?

We could maybe fund it through banks, but it would be higher interest rates and delay things with applications etc.
Anyone done anything similar?

Any help much appreciated

paddyrg

Sounds like a pretty wilful and open-eyed breach of the loan terms to do so - and if they find out I would not be surprised if they called in the whole loan in one go - meaning you may be forced to sell the house in fire sale conditions.

Now admittedly if you take a business loan, they will still secure it against your house, but at least you're playing the game properly!

zxspeccy

paddyrg wrote: »

Sounds like a pretty wilful and open-eyed breach of the loan terms to do so - and if they find out I would not be surprised if they called in the whole loan in one go - meaning you may be forced to sell the house in fire sale conditions.

Now admittedly if you take a business loan, they will still secure it against your house, but at least you're playing the game properly!

Would totally agree with this, a mortgage is a loan for the purchase of your main residential property. Getting a further advance on this mortgage for business purposes would be seen as breach of contract, which could in turn means the bank might call in the borrowing. “Home Improvements” is an acceptable reason for an advance on you mortgage, however it is taking a risk claiming the funds are for this purpose.

As long as you keep up the repayments and the bank are fully secured, then it is unlikely they will notice, but do you want to take that risk.

I would go down the business loan route, as the bank will only need to take out a second mortgage against your property to secure it. It may not be a higher rate of interest as this depends on the strength of you business plan, reputation of the franchise and annual accounts performance if it is an existing franchise you are buying into. Also aren’t you going to need a business account with your bank to run the franchise? If so then isn’t it best to open and honest with the bank at the outset. Most banks have business managers that specialised in certain sectors (franchises being one of them), so could offer you plenty of support going forward.

bargainbetty

If you take a loan and breach its terms, you are indeed liable for full and immediate repayment if the bank decide to call it in. If the business failed and you were unable to pay, you would find the banks incredibly unsympathetic and would probably push for repossession/forced sale of the property to recoup their money. You would not be likely to get accepted for a DMP should things go wrong!

Additionally, if discovered, you can guarantee that the loan application would be marked as fraudulent on your credit reports, and evey potential lender for six years would see it. Do you really want to go into this dishonestly?

It's too big a sum to play games with - if you approach your bank about it openly you might also receive business advice, two years free business banking etc... and you won't be looking over your shoulder for years to come.

homedad

Thanks for the advice so far. Interesting to know what the worst case scenario would be at least.
We would indeed need a business account, which i would probably get from a different bank as i would prefer keeping business and home banking seperate.

paddyrg

Alas, whilst the mechanics of the banking may be separate, you will likely find you'll be taking a charge against the property anyway for any loans, overdrafts, cards, etc., and that it may actually be easier to get banking from a bank where you already have a solid relationship!

Good luck with it all

Apples2

Before I start I will admit I have no idea what I am talking about in this field so I will throw a question in I thought of.

If you take a substantial loan for home improvements from your mortgage provider, secured on the house. Is there any likelyhood they would want a valuation of the property on completion of the "improvements"?

It would have an effect on the equity of your property, hopefully rasing it's value by "at least" the cost of the improvement.

It would look a bit strange when the post improvement valuation unearthed no change to the value.

DCFC79

Apples2 wrote: »

Before I start I will admit I have no idea what I am talking about in this field so I will throw a question in I thought of.

If you take a substantial loan for home improvements from your mortgage provider, secured on the house. Is there any likelyhood they would want a valuation of the property on completion of the "improvements"?

It would have an effect on the equity of your property, hopefully rasing it's value by "at least" the cost of the improvement.

It would look a bit strange when the post improvement valuation unearthed no change to the value.

I too have no idea on this aspect but I would have thought there would be some kind inspection or at least want a valuation to A check what the 'new' value is and B if the 'home improvements' were actually carried out otherwise everyone would be stating 'home improvements' for a loan reason and using that money for non improvement stuff.

jonesMUFCforever

What OP really needs is a business loan/mortgage secured on the home. ie a 2nd mortgage.
Carrying on with the present application is fraud - pure and simple.

homedad

thanks for all replies, made us realise what a risk it would be to use this money for our intended purpose.
we will be seeing an accountant next week so will discuss alternative funding sources with them.

Emmzi

You seem new to running a business?

If so spek to business link. There is also a small business board on this forum.