Registered mortgage vs caveat: What’s the difference for NZ business loans?

This is not a substitute for legal advice. If you are thinking about a secured loan, we always recommend getting independent advice.

If you’ve ever tried to get a secured business loan in New Zealand, you’ll know it’s not always easy to get money through the banks, no matter how loyal you are and how many accounts you have with them. Banks usually want detailed financial statements, plenty of history, and lots of time to process an application. They’re very risk-averse, which is why they are the cheapest source of business loans. But that risk averseness can be a real barrier when you need cash quickly to grab a business opportunity or manage cashflow. And if you’ve got IRD arrears, your chances of securing funding, even with plenty of equity in your home, are extremely low (see my other blog post about that here.

If you’re not afraid of putting your property up as security, this is where non-bank and second-tier finance companies come in. They’re generally faster and more flexible and there are plenty out there that are happy to lend against your house. And that’s where it’s important to understand the difference between a registered mortgage and a caveat. Both are used to secure business lending, but they work quite differently and have very different implications if something goes wrong.

what is a secured business loan?

A secured business loan is a type of finance where the borrower (you) offers an asset — usually property — as collateral. If the business can’t repay the loan, the lender can use that asset to recover the money owed.

Secured loans often come with lower interest rates and larger loan amounts, because they reduce the lender’s risk. The trade-off is that the your property is on the line if you default.

what is a registered mortgage?

A registered mortgage is the most formal type of property security. It’s registered on the property title with Land Information New Zealand (LINZ), showing that the lender has a legal interest in the property.

From the lender’s point of view, this provides strong protection. You can’t sell, refinance, or transfer ownership of the property without their consent. And if the loan isn’t repaid, the lender has the right to take possession and sell the property to recover the debt.

Because of these strong rights, registered mortgages are typically used for larger or longer-term secured business loans. They require more documentation and due diligence, but they also provide lenders with greater confidence — which can make it easier to borrow bigger amounts.

what is a caveat?

A caveat is a different kind of security notice. Instead of giving the lender full rights to your property, a caveat acts as a warning on the title that someone else (the caveator) has an interest in your property.

When a caveat is lodged, it effectively blocks the property owner from selling or further mortgaging the property until the caveat is lifted or resolved. This makes it a popular option for short-term business loans where speed is crucial and setting up a full mortgage would take too long.

However, a caveat doesn’t allow the lender to automatically sell the property if you default. To get their money back, they would need to apply to the court — a process that’s slower and less certain than enforcing a mortgage. If things are looking dicey, they may contact you about registering a mortgage before things get really bad, which is an indicator to you that you need to act quickly to get your loan repayments back on track, or refinance your loan.

registered mortgage v caveat, the main differences

WHAT HAPPENS IF YOU DEFAULT ON A SECURED BUSINESS LOAN?

If your loan is secured by a registered mortgage, the lender can move fairly quickly to enforce it. They’ll issue a demand for repayment, and if that’s not met, they can proceed with a mortgagee sale. The property is sold, the lender gets their money back, and any surplus funds go to you.

If the loan is secured by a caveat, it’s a different story. The lender can stop you from selling or refinancing the property, but they can’t simply sell it themselves. They’d need to apply to the court for a charging order or other enforcement method. This makes caveats less powerful but also less intrusive than mortgages.

WHICH OPTION IS RIGHT FOR YOUR BUSINESS?

We can’t tell you what is right for your business, and our advice if you are thinking about secured borrowing is to get advice first. But if you’re exploring property-backed business finance, the right type of security depends on your situation, and may ultimately be dictated to you by your lender:

• Registered mortgages are usually for long-term borrowing or larger loan amounts where the lender needs stronger protection.

• Caveats work well for smaller, short-term, or bridging loans where speed and flexibility are the priority.

FINAL THOUGHTS

Understanding the difference between a registered mortgage and a caveat is crucial before you agree to any secured business loan in New Zealand. Both can be effective tools for accessing funding, but they carry very different rights and obligations for you and your lender.

Before signing anything, always get independent legal and financial advice. Knowing exactly what you’re agreeing to will protect both your property and your business down the line.

And if you need a secured business loan and the bank has said no, we have a range of lenders that will be happy to look at your application. Contact us to find out more.

7 habits to make you irresistible to business lenders

Running a business is tough, and the small business owner wears many hats: sales, finance, marketing, HR, operations, client service … it’s exhausting! Sales, operations and client/customer service usually take precedence, because it’s all about making money, right?  But taking a little bit of time every day – it could be as little as 15 minutes – to put your Finance Manager hat on, can make a big difference when it comes to applying for all kinds of business finance. The idea is to be an irresistible prospect for lenders. When your financial house is in order, business lenders see a lower risk and are more likely to offer you those coveted lower interest rates. Plus, adopting good habits can save you and your business time and money in the long run. Here are seven daily or weekly finance-related habits that will not only make you more attractive to banks, lenders and financiers but also keep your business thriving.

1. Sweep GST on invoice payments received to a savings account

Every time you receive a payment, make it a habit to sweep the GST portion into a separate account. This simple step ensures that you're always prepared for GST time, avoiding any last-minute scrambles. Plus, it keeps your main account balance accurate, giving you a clearer picture of your cash flow.

2. Reconcile your bank statements regularly

Don't let bank reconciliations pile up. Make it a daily task, or at the very least, do it once a week. Regular reconciliations help you spot discrepancies early, meaning they are quicker and easier to fix because you don’t need to think back too far to figure out what’s gone wrong. It also ensures that your balance sheet is up to date. Lenders love seeing a business that can whip up accurate financial statements in the blink of an eye.

3. Adjust direct debits to match customer payments

Timing is everything, especially when it comes to cash flow. Adjust your direct debits so they coincide with incoming customer payments. This way, you'll always have the funds available to cover your expenses, avoiding overdraft fees and showing lenders that you manage your cash flow smartly.

4. Pay GST and PAYE when you submit your returns

Don't procrastinate on your taxes. Get into the habit of paying your taxes at the same time you file your tax returns – Inland Revenue gives you the option to do this when you file your GST and PAYE returns. If you’ve followed point 1 above, then this should be a piece of cake. This practice not only keeps you compliant but also avoids the accumulation of debt that can make your business look risky to lenders. And if you do get behind on your taxes, contact IRD to make a payment arrangement, they’re always happy to help (they’re not so bad, after all!). Lenders don’t mind so much when you are behind on your tax payments if you have a payment arrangement in place. They will treat it like any other business borrowing when assessing your loan application.

5. Maintain an emergency fund

Set aside a portion of your earnings into an emergency fund. This fund acts as a financial safety net, helping you weather unexpected expenses or downturns. This shows lenders that you're prepared for the unexpected and capable of managing risks.

6. Monitor your accounts receivable

Keep a close eye on your debtors. Nobody likes to do this, but you need to follow up on overdue invoices promptly. If you can withstand the cost, you could offer incentives for early payments. Effective management of your receivables improves cash flow and demonstrates to lenders that you’re proactive in managing your income streams. (Or if you have an invoice finance facility, your lender will do this for you – cash and accounts receivable help - bonus!).

7. Automate where possible

Leverage technology to automate routine financial tasks. Whether it's invoicing, payroll, or expense tracking, automation saves time and reduces the risk of human error.

Adopting these habits will not only make your business more attractive to lenders but also streamline your financial management, saving you time and money. Don’t we all want to spend less on accounting fees? By showing that you're proactive and responsible with your finances, you'll be in a stronger position to secure favourable business loan terms. Remember, the key to a thriving business is not just in making money but in managing it wisely. So, get started on these habits today, and watch your business flourish!

Then when your need to buy a vehicle or equipment, or business is growing and you need to finance that growth through a secured or unsecured loan, or invoice finance, we can help you get the finance you need … quickly and efficiently if you’ve implemented some of our suggestions!