Chances are that a Google search for small business loans will reveal a variety of non-bank lenders offering low cost, fast ‘caveat loans’. But what is a caveat loan?
The technicalities
A caveat is a document lodged by a party with an interest in land (for example, a lender) preventing the registration of particular dealings with the land. Caveats can be thought of as warnings to the public that a party has an interest in a property. The party who lodges the caveat is known as the caveator. Once a caveat is lodged, other dealings with the land (for example, mortgages and transfers) cannot be registered without first dealing with the caveat on the title.
How do caveats relate to business loans?
Many lenders in the market advertise that they offer ‘caveat loans’ for small businesses. A caveat loan is secured against the amount of equity in your property (for example a house, flat, vacant land or commercial property).
After you enter into a loan agreement with a lender, that lender will lodge a caveat over the property you put forward as collateral to try and protect their position. In some cases, lenders will fund a loan on the basis of a caveat before moving to lodge a mortgage over the property after funding the loan. After the loan has been repaid, the caveat should be taken off the property.
What are the advantages for borrowers?
A caveat loan can come with many benefits for business borrowers. Caveat loans:
- are useful for businesses with urgent funding needs, as they can be lodged and registered quickly without long delays;
- allow borrowers to use the equity in their property as security, rather than having to rely on things such as cash-flow;
- can be used by lenders to get deals over the line in tighter funding circumstances;
In many cases a bad credit history won’t be a deterrent to getting a caveat loan.
Issues for small business borrowers to consider
Loans funded on the basis of a caveat alone are riskier to the lender. This means that they come with higher costs, and are usually only suitable in short term situations.