The pros and cons of leveraging home equity for business finance
There are many expenses to consider when starting or growing your business, from leasing property and purchasing equipment to hiring and training staff. For many business owners, leveraging home equity for business financing is an attractive alternative, whether through an SBA loan, a business home equity loan. , Home Equity Line of Credit (HELOC), or Home Equity Investment – a relatively new option available in many states that, unlike other alternatives, does not require taking on additional debt.
Each alternative has its pros and cons, and business owners will want to think carefully about their individual living circumstances, willingness to take on new debt, and financial flexibility before deciding which path is right for them.
SBA loan (Small Business Administration)
Maximum funding: $ 5,000,000
A conventional small business loan, or SBA loan, is often the first avenue for many business owners seeking financing. Backed by the Small Business Administration, these loans are provided by banks, microloans, and commercial lenders and often feature lower interest rates and more flexibility than traditional bank loans.
One of the main challenges with traditional small business loans is the paperwork and paperwork they require. Many ask for a personal wealth guarantee to secure the loan. It is also important to note that if your business is particularly small, for example if you are the sole owner or if you only have one in two or three employees, it can be particularly difficult to obtain a loan. Just about 15 percent individual businesses have business loans.
If your SBA loan application was rejected, you can learn why and better understand the next steps to take.
Home equity loan for business
Maximum financing: up to 80-85% of the value of your home in general
A home equity loan allows you to borrow against the equity you’ve built in your home, using the home to secure the loan. On the plus side, these loans offer predictable interest rates, so your monthly payment stays the same every month, which can be especially appealing if you are looking to use a home equity loan for business purposes.
And unlike most business lines of credit, you don’t have to pay off the balance to zero every year. In fact, a home equity loan can be attractive for its generally flexible repayment periods, which typically range from 5 to 15 years. In addition, the interest on your home loan may be tax deductible.
However, a home equity loan is a second mortgage on your home, so you’ll need to be prepared to make an additional payment on top of your existing mortgage. The application and approval process can also be a bit difficult due to the specific requirements of the lenders.
Home equity investment
Maximum funding: depending on the investor, but generally up to $ 500,000
A home equity investment provides money in exchange for a share of the future value of your home. Unlike a loan or HELOC, you don’t have to worry about monthly payments or interest. You can use the money for anything you want, whether it’s buying equipment, renovating offices, or expanding your business. The schedule is also relatively quick, and once you’re approved, you can receive funds in as little as three weeks. At or before the end of the effective period, which is usually between 10 and 30 years, you will have to pay off the investment. You can do this through a refinance, buyout, or sale of your home.
As with all home equity products, a homeowner accesses the home’s value to help their business succeed. But what makes a home equity investment a little different from the other options discussed above is the potential downside protection it offers. With some investors, if the value of the home depreciates over time, the amount investors receive also decreases. Conversely, if a home is experiencing rapid appreciation, so does the investor, although the investor’s rise is often capped at a percentage of the investment per year.
The home equity investment alternative has spread to a growing number of states.
Refinancing of collection
Maximum financing: up to 80% of the value of your home in general
Refinancing with withdrawal gives you access to cash by paying off your existing mortgage with one that has a greater balance than you owe on your home. While you can potentially get a lower interest rate this way, refinancing extends your mortgage repayment term. You will also need to pay the costs associated with your first mortgage, including application and closing costs. There are also prepayment penalties and cancellation fees to be aware of.
Home Equity Line of Credit (HELOC) for Businesses
Maximum financing: up to 80-90% of the value of your home in general
If you are looking for flexibility, a HELOC for your small business may be a good option, as it gives you the flexibility to access funds at any time and you can withdraw more as needed without any penalties. The application and approval process tends to be easier than the other options. As with a home equity loan, the interest may be tax deductible, and the repayment period typically ranges from 15 to 20 years.
Yet unlike a home equity loan which typically has a fixed rate, a HELOC’s variable interest rate means that payments will be unpredictable each month. Plus, if your credit rating or the value of your home goes down, the lender can freeze your HELOC at any time.