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Home Equity Line Of Credit: A Potential Start-Up Loan For Your New Business

28 June 2016 by Albane Francois

The equity that you've built in your home can help finance that new business you've been dreaming about. But banks often hesitate to lend money to businesses that aren't yet established; therefore, a home equity line of credit (HELOC) can give you the capital you need to get started. Still, you need to know how a HELOC works before you take the plunge.

Features of a HELOC

With a HELOC, you can carry a large line of credit that allows you to access money when you need it, up to your maximum credit limit. Generally, there are closing costs when you obtain the loan, but the lender may pay some or all of the upfront costs if you pay a higher interest rate. Although you still may need to have your home appraised when financing the loan, the interest you pay on a HELOC loan may be tax deductible on your federal tax return if you itemize deductions.

Repayment of a HELOC

You may find it easier to qualify for a HELOC loan than a business loan since you are securing the loan with the equity in your home. Depending on how much your home is worth and the amount of equity you've earned, you may qualify for a large loan. Regardless of how much money you borrow, you need to consider how you are going to repay the loan.

In some cases, you pay only the interest on the money you borrow until the end of the loan term – or draw period – when a balloon payment is due to pay off the outstanding principal balance. During the draw period, you may make payments on the principal in addition to the monthly interest payments without being penalized. Another option is to negotiate a repayment period that follows the draw period with the lender beforehand. At that time, you can get a fixed rate of interest.

Interest Payment on a HELOC

It's important to keep in mind that while the rate of interest you pay at first may be lower than the interest you would pay on an unsecured loan or credit card, you will pay an increased rate if you exceed the loan-to-value ratio – the percent of your home's value that the lender makes available to you. The amount of money you pay back in interest also will increase as you draw more money. In addition, the variable interest rate you pay can increase at any time, increasing both the cost of the loan and the amount of the monthly interest payments you make.

Key Considerations

Since there is the possibility that you can lose your home if you fail to make the payments, using a HELOC only as a short-term loan to initially finance the launch of your business may be a more practical approach. Once your business gets off the ground and begins to make profits, you will be able to show a lender that you are earning a reliable income. When you've reached that point, you can use the assets of your business as collateral to qualify you for a business loan and then use the funds to pay off the HELOC.

You will be able to do this faster if you increase your working capital by reinvesting the profits you make back into the business rather than using your business profits to pay for your living expenses. Investing in marketing and advertising, more inventory, and technological improvements helps you steadily build your customer base.

Speak to a loan professional for more information about a HELOC or equity loan.

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