Equity Loan
Using your assets to help your business
By Alan Galatian
The equity in your home can be a valuable tool for starting a new business or for providing additional financing options to cover your existing business needs.
Start-up Businesses
Although the SBA (Small Business Administration) is available to aid new businesses, qualifying can still be difficult and most lenders are looking for a business to be established a few years before they will consider offering a business loan. Those of you who feel you have bad credit or fair credit may want to stay away from the business loans for now. The lack of time in business, plus higher credit requirements, will greatly affect the decision made on the loan.
If you have sufficient equity available in your home, you can tap into it to get your business up and running. Not only are the home equity loan rates reasonable, you may be able to deduct the interest from your taxes. To find out how much equity you have, get an estimate of the value of your home and check the balance on your mortgage(s). The difference will be the amount of equity you have.
Now, shop around with some lenders to see how much they can lend. Depending on the type of home you have, lenders can lend from about 80 percent to 100 percent loan-to-value. As an example: You own a townhouse that is valued at $250,000 and you owe $150,000. You find that the lender can offer up to 80 percent loan-to-value; so 80 percent of the value leaves $200,000. Deduct the balance on your mortgage and this leaves $50,000 available to use.
When making business purchases, be sure to keep all receipts and documents related to the purchases. Once you have your business operating successfully for two to three years, you may be able to consolidate the business debt into a business loan. Your business lender will want to see that the debt is business related.
Existing Businesses
If you've been in business for a while and need a boost in capital to cover expansion costs, payroll, etc, a home equity line or loan can be very helpful for you as well. Some lenders offer a business equity line of credit in addition to the personal home equity options.
The business equity line is opened in the business name and uses your home as collateral. This allows you to build credit in the business name while obtaining the capital that you need. The initial credit inquiry is performed on your personal credit, but the open account will report under your business credit history.
Equity Loan vs. Equity Line of Credit
When considering your lending options, keep in mind how you plan to use the funds. If you'll need all of the funds at once and don't plan to have future lending needs, using a home equity loan may be sufficient. The equity loan interest rates are normally fixed for a specific term.
The home equity line of credit allows you to borrow from the line multiple times without having to re-apply for credit. This works well when you need to regularly cover payroll while waiting for payment from a client, or to cover merchandise purchases. The interest rate for the equity line is normally a variable rate.
Be sure to shop around and get quotes from large banks and small local banks as well. Compare the features, terms and fees. Plan your budget well and don't take more than you can afford to repay. After all, you are putting your home on the line. With the proper planning, the home equity loan or line can be a great asset to your business.
