Every business needs funding to stay afloat, and while there are several traditional financing options you can consider when looking for capital, they’re not accessible to everyone. That’s why savvy business owners in Australia are turning to alternatives like self-managed super fund (SMSF) loans and guarantor loans to get the money they need for their business growth.
What Are SMSF Loans?
SMSF loans are investment loans that allow you to use your retirement savings as a deposit when buying a property. Unlike regular super funds, where someone else manages your money, an SMSF lets you choose where and how to invest your money.
This is how an SMSF loan works: your super fund borrows money to buy property, which is held in a separate trust. Your SMSF owns the benefits of the property. In other words, any income from the property (like rent) goes back into the SMSF, which can be used to offset the loan or grow the fund. The trustee holds the legal title until you pay off the loan.
One of the best things about SMSF loans is that they are Limited Recourse Borrowing Arrangements (LRBAs). If something goes wrong and you default on your loan payments, the lender can only seize the property bought with the loan. The rest of your super savings will not be touched.
What Are Guarantor Loans?
Guarantor loans need you to bring someone else – a guarantor – who will agree to take responsibility if you fail to fulfil your financial obligations for the loan. Guarantors are usually close family members, such as your parent, grandparent or sibling. To qualify as a guarantor, that person generally needs to be a homeowner, as the equity in their house will be used as additional security for the loan. This extra safety net will enable you to borrow more and secure better loan terms.
The Benefits of SMSF Loans
SMSF loans offer many advantages for business owners:
- Greater Flexibility and Control: An SMSF loan allows you to invest in property through your super, giving you more control over your investment strategy.
- Tax Savings: You pay less tax on any money from the property secured through an SMSF. For example, rental income on an SMSF property is usually taxed at only 15% in the fund, which is significantly lower than what you will pay if you purchase the property out of pocket.
- Diversification: SMSF loans enable you to diversify your investment portfolio. By spreading out your money on different assets, you’re not relying on a single investment to grow your retirement savings.
The Benefits of Guarantor Loans
Guarantor loans also have their own advantages:
- Access to Financing: A guarantor loan can help you secure the funding you need to expand your business.
- Better Loan Terms: Guarantor loans often come with lower interest rates and fees since lenders have more security if the borrower fails to fulfil their financial obligations.
- More Working capital: Most lenders don’t ask for huge deposits when applying for a guarantor loan. This allows you to keep more money at hand for your day-to-day business operations.
Choosing the Right Financing Option for You
The best financing option to choose will depend on your specific situation. Here are a few things to consider when deciding between an SMSF loan and a guarantor loan.
Your Timeline: An SMSF loan is a better option if you’re thinking long-term and not looking for quick gains. But if you need cash quickly or want to sell your business soon, a guarantor loan may be more suitable.
Financial Resources: You need a super balance of at least $200,000 to make an SMSF loan worthwhile. So, a guarantor loan is the way to go if you don’t have a lot of money saved up in your retirement fund.
Relationships: You need a guarantor to obtain a guarantor loan. If you don’t have someone who is willing to take the risks or don’t want to put your relationships on the line, go for an SMSF loan.
Final Thoughts
SMSF loans and guarantor loans are powerful financing tools for business owners. They can help you secure the money you need to scale your business without going through the hassles of dealing with the big banks. However, the right financing option to choose depends on your situation, your goals, and how much risk you’re willing to take.
No matter which option you are considering, it’s important to speak with an expert to ensure you fully understand what you’re getting into before taking the leap.
