Mortgage Loans

Security is required by a founder to act as a potential insurance policy should things go wrong. They will be looking for assets that have three important attributes; that can be easily; made subject to a legal charge, valued on a current basis and sold in the event of default. From these three attributes you can easily understand the implications and logic of granting security for a debt. If the debt is not repaid as arranged, the assets will be seized and sold by the founder to gain repayment. It is as simple as that. There are some predefined guidelines as well.

Some founders have clear internal guidelines as to when a request for security should be made whatever the proposition. For some types of funding, for example hire purchase, the asset that is purchased is used as the security for the debt. There can be no clear guidelines as to whether a request for security is reasonable. It should depend entirely upon the proposition. You will need to decide for yourself whether the request is reasonable and, if necessary, arrange a different package of funding. If you are purchasing assets to be used in the business this is made a lot easier by opting to use a finance company.

If you have a family they may be a large consideration as to whether or not security should be given, especially when it takes the form of a mortgage over the family home. Always remember the implications outlined above. If your business fails the family home will be sold to repay the debt.

Before granting the mortgage you will need to be absolutely sure that your business proposals are sound and secure. The founder wants to see you succeed but, if things do go wrong, they will have no compunction in seizing your assets. They will not accept a bad debt lightly and will make every effort to pursue you for repayment. It is essential, therefore, that you have the total commitment of your spouse or partner to your business. They will need to be convinced that the risks of losing their home will be minimal.

Having already emphasized the risks involved in granting security, the founder will only take

such steps if there is no alternative. Let assume that the business has failed totally and still owes money to creditors, including a founder to whom security has been granted. At this point of time, you must face up the situation. You cannot ignore the position in which you find yourself and hope that it will go away. If you do this you will inevitably lose everything. Your first step must be to seek some alternative way in which to earn an income. If you can make an acceptable alternative repayment program for your debts it is unlikely that the founder holding the security will actually attempt to realize it.

Realization of security will always be the founder’s final option. They have no wish to encounter possible bad publicity in the event of a forced sale of the family home. When you encounter a situation that is likely to cause your business to fail you must seek help and advice from the founder. If you talk to them they will be sympathetic.

Your house is likely to be the greatest asset that you own although it may already be the subject of a mortgage. The founder will require full details of exactly who owns the house, be it in your sole name or with a partner and more importantly who actually lives in it. The reason for this is that the property may be occupied by someone who does not actually own it but by living in the property they may have a legal vested interest.

The founder will require a number of formalities to be completed before they lend any money against the security quite apart from the signing of a legal mortgage. If it is a second mortgage they will require full details of the first mortgage together with confirmation that repayments on that mortgage are up to date. The founder will also want to ensure that the property is adequately insured against fire and other risks.

In some circumstances the founder may require a full professional valuation to be obtained. In majority of cases the founder will make a personal visit to ensure that the property is in a reasonable condition and suitable as security. Once the valuation has been obtained the founder will then usually discount this value by between 10 per cent and 30 per cent. The reason for this is to allow a contingency factor and provide for the costs of sale should it be necessary for the property to be sold to repay the debt.

If you are not actually occupying the property yourself, the proper valuation may be discounted by as much as 55 per cent. In all cases any prior mortgage is then deducted from the residual value to calculate a valuation of the security. This may seem harsh but, if the founder does take possession, they will not want a protracted sale. It must value the property and indeed offer it for sale at a price that will ensure a quick disposal. The founder will require you to meet all the external costs of taking the mortgage, together with a security fee to cover their own administrative costs.

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