Financing Your Business with Home Equity Loans

A home equity loan can help you if you own a home with some equity and wish to start a small business. however, before you pursue this loan, make sure to consider the pros and cons. It is wise to consider other financing options to ensure that you make the most informed decision,

In this article, we will explain what you can expect if you decide to finance your business loan with a home equity loan.

What are Home Equity Loans?

Your home’s equity is the difference between the current value of your house and the amount you owe on your mortgage. The amount of equity you have in your home will determine how much you can borrow through a home equity loan.

With a home equity financing, you receive one lump sum of money that you repay via fixed monthly payments with interest over an agreed upon term. If you’d like a more flexible financing option, you can choose a home equity line of credit (HELOC).

During the draw period you can withdraw the money you need up to your limit. Once the draw period is over, the repayment period will begin.

The loan repayment period, which ranges from 10 to 20 years requires you to pay back the principal plus any interest on your borrowed amount. In addition, you won’t be able to withdraw more money from your HELOC during the repayment period.

Pros of Home Equity Financing for Your Business

• Low interest rates: if you take out a personal loan from a bank, credit union, or online lender, you might be stuck with a high interest rate. New business owners or those with poor credit end up with high interest rates than those with good credit scores.
• Flexibility: home equity loans are flexible because you can spend the funds in any way you would like.
• Longer repayment terms: a home equity loan is a great option if you can pay back a loan within a few years. You will have more time to repay the loan and can do several payments over a period of time.
• Easy to obtain: you shouldn’t have any trouble applying or receiving approval for a home equity loan. You can work with your mortgage lender to expedite and simplify the process.

Cons of Home Equity Financing for Your Business

• Must own a home: you can only receive this type of financing If you own a home. If you rent a property or don’t have any equity in your home.
• Put your home at risk: you run the risk of losing your home because it is a secured loan. If one day you default, the lender can foreclose your home.
• Upfront costs: you might have to pay upfront costs and appraisal fees so be on the look out for that. They can be expensive and increase the overall cost of your home equity loan.
• Two mortgage payments: if you haven’t paid off your home, you will put yourself in a situation where you have two mortgage payments which can be very costly.

The Bottom Line

Home equity loans are affordable and an easy way to meet your small business’s goals. If you qualify for them. Before you get started, read all the terms carefully. This way you can avoid unwanted surprises and feel confident that you made the right decision.