There are several ways for an owner to secure funding for a new venture or to push a small business through difficult times. A home equity loan may be a solid option for those that also own a home. All financial situations are not created equal. Consult with a trusted financial adviser before incurring more debt or borrowing against home equity for a better analysis of your personal situation.
Home Equity Loans and Your Business
Buying a home is typically the largest investment a person will make. As they pay off their loan, they begin to own more and more of their home until the mortgage is completely paid off and they are the sole owner. The buyer “owns” the equity in their home that they have already paid off. These funds can be drawn on through different ways. Additionally, a buyer with an “open-ended mortgage” can write checks or draw on a line of credit against their equity without seeking additional loans.
In many cases, funding secured through a home equity loan will be at a better rate than financing options specific to businesses. That can easily be tens of thousands of dollars in savings on interest over the lifetime of the loan.
Using Home Equity Loan Funds
A common hang up for a business owner is the desire to not put their home at risk in case the business does not overcome the difficulties ahead of it. However, if all of the owner(s) of the business are on the mortgage agreement for the home then it is already at risk to creditors if the business goes under. That mentality can keep the owner from borrowing at a time when their business may be weak but able to overcome the present conditions.
A home equity loan can provide additional funding to get through slow seasonal periods, weather a weakened economy, or overcome an emergency set-back. There is always the option to sink additional funds into the business to help promote its growth even if it’s doing well. A home equity loan, while viable, should be held in reserve until it is truly needed.
Other reasons to use a home equity loan include…
- better interest rates than credit cards and business-based financing. (5-7% vs 20-25% interest)
- A higher degree of flexibility in how the funds can be used versus other loans.
- Often easier to secure when launching a new business venture.
- Often kinder in acceptance and rates to bad credit borrowers.
Shortcomings and Considerations
A home equity loan may not be the best solution for every potential borrower. The borrower needs to take a long, hard look at their present financial situation. Will they be able to make the additional payments? Is there a real prospect for the business to be successful enough further down the road to warrant the loan? There’s no sense in piling more assets onto the ship only to delay it sinking.
Consult with a professional who can offer objective advice before making a commitment.
This helpful sponsored business information was provided by Brentt Taylor. Brentt has been writing about finance related issues that affect consumers since 2009 before he became part of the online editorial team of MortgageLoan.com, a site that has been publishing news and content since 1995.