You have a business idea and want to leave your conventional workplace to start a new business. Not many people make such a leap, especially because of the huge investments and funds needed to startup a business. Luckily, finding funds for your startup can come from several sources. One popular source is through your home’s equity. However, you need to consider the advantages and disadvantages of utilizing your home equity for your startup.
When experts refer to using home equity for a startup, they are most likely talking about a home equity line of credit or a HELOC. A HELOC is when you apply for a line of credit from a lender where the collateral is your home’s equity. This line of credit works like a credit card, with monthly payments, an interest rate, and a revolving balance.
An advantage to a HELOC is that these loans often provide immense lines of credit with a lower interest rate than a general home equity loan. In addition, as a line of credit, you can use as much money as you want at various times instead of working from a lump sum of money. Also, if you do not utilize some of the credit given from the HELOC, then you do not owe owe money from the available credit. On a taxation level, you can deduct the HELOC, or any home equity loan, as a business expense or as a personal deduction if you are classified as a “S” corporation.
A disadvantage to a HELOC is that since a HELOC is connected to your home equity, such a line of credit works best during a strong economy. When housing prices are rising and interest rates are stable, lenders will be more readily to lend a HELOC to you when your home has appreciable value to it. In addition, during times where housing interest rates are low, the interest rate on your HELOC will also be low. That being said, the financial and housing crisis has taken a toll on the amount of HELOCs out there and on existing HELOCs. Many banks could have ceased providing HELOCs or change the terms of existing HELOCs. Another issue is since you are utilizing a HELOC, you may severely limit your opportunities to apply for a loan associated for your home, such as remodeling. For example, if your home is damaged in a disaster or you need an investment for your home, you may be unable to apply for a new loan related to your home’s equity. It is important, then, to consider if your home needs extra equity built into it first before applying for a HELOC.
If you still want to get a HELOC, one piece of advice is to make sure you maintain your current employment. You should be considering your startup plans while still an employee. This will not only give you a mature financial plan for your business, but you will show a lender your steady income. In addition, since you are transitioning from a conventional employment situation to a startup, you need to make sure your credit is healthy. Making sure you can pay all your debts and meet all of your current housing and life expenses will help you stretch out your HELOC for business investments instead of using it to pay for bills. Additionally, since your new income will be tied to your new business, you need to make sure your new business has a solid growth and expansion plan. As your HELOC, mortgage, business expenses, and other life payments add up, you need to make sure your business will be profitable enough to pay back and pay for all your expenses. Finally, you should prepare yourself for your lending application. If you ask a lender for a HELOC for a business startup, a lender may want to steer you toward commercial loans. If you are uncomfortable communicating with the commercial-side of lenders, try to find no-ask, no-tell home equity loans. It is important to remember, however, not to lie in a loan application. If a lender does ask you why you need a HELOC, or any other home equity loan, you must tell them it’s for a business startup.
Considering your business strategy and the relative health of the housing market, a HELOC may be an excellent investment for your startup. Just know the risks that are attached to such investments and you can startup your new business today.