Guest post by Rebecca Lee
When you’re starting a business, it’s not always easy to get a loan from a bank. In fact, many small businesses are started with no outside funding at all. One way that some entrepreneurs choose to fund their businesses is by using the equity in their home. This article will explore the pros and cons of using home equity to start a business.
Things To Consider
So, what are some things that you should consider before borrowing money against the equity in your home? Let’s take a look:
When considering if it is right for them, small business owners need first understand what “equity” actually means. Equity represents the difference between how much a home is worth and how much the owner owes on it. Using this equity, business owners can borrow money through their homeownership at a lower interest rate with more flexible terms in order to finance their startup costs via a Home Equity Loan (HEL).
The benefits of this move are twofold: firstly, the interest rates associated with HELs are generally lower than other types of loans meaning less financial burden for the small business owner; secondly, as these loans are considered secured debt against an asset – the homeowner’s property – repayment periods and amounts can be negotiated to be far more manageable then what would be expected with an unsecured loan from a bank or alternative lender. In addition, many HELs come with tax breaks for the business owner, making the total cost of borrowing even more attractive.
However, there are a few risks associated with this course of action that business owners should be aware of before signing up. Most notably, if the business fails and is unable to repay what it owes on the HEL, the owner could lose their home. Additionally, not everyone has enough equity in their home to borrow as much money as they may need in order to finance their startup costs in its entirety – so care should be taken when considering how much is borrowed against available equity.
Finally, small business owners must ask themselves if taking out a Home Equity Loan is really the best option for them at this stage; depending on current credit score and other associated expenses (e.g. maintenance, property taxes), it might be more advantageous to seek out other forms of financing.
Pros
The pros of using home equity to start a business are that the interest rates are usually lower than those on other types of loans, and the terms are usually more flexible. This means that you might be able to pay back the loan over a longer period of time and with smaller payments. It can also be a tax deductible expense, which can help reduce your taxable income.
Cons
The cons of using home equity to start a business are that you’re putting your home at risk if the business fails. You could lose your house if you can’t pay back the loan. Businesses often start with many failures. Another consideration is that you might not have enough equity in your home to get a large enough loan to cover all of your startup costs.
Determining Your Equity
Like mentioned before, equity is the difference between how much your home is worth and how much you owe on it. So, if you owe $100,000 on your home but it’s worth $200,000, you have $100,000 in equity. You can borrow against this equity to get a loan for your business.
Is It A Smart Decision?
So, is using home equity to start a business a smart move? It depends on your personal situation. If you have good credit and plenty of equity in your home, it could be a wise decision. At the same time, it’s a pretty big risk because you could lose the home in the rare case you can’t payback the loan. But if you’re already struggling to make ends meet, taking out another loan might not be the best option. Do your research and talk to a financial advisor before making a decision.
