The BizFilings blog covering business tips and trends.
Should You Use Your Home's Equity to Fund Your Business?
Published on Jun 2, 2009
Read our article, 'Should You Use Your Home's Equity to Fund Your Business?' at 'Time to Start Up,' the small business blog by BizFilings.
If you’ve been having trouble getting a traditional business loan from a bank, you’re not alone. Many entrepreneurs and small business owners are finding it harder to come by money than it would have been even just two or three years ago. The natural reaction is to cast a wider net; and that’s where the home equity question arises as an option to fund your business.
Should I or shouldn’t I? Many small business owners are leery about mixing their business with their personal, especially if you’ve incorporated in order to avoid those exact dangers. BTW – Always check with your lawyer or a CPA to make sure the way you go about moving the money within those lines is ok.
But, if done properly and responsibly, using the equity in your home can be a good way to get money for your business.
Home equity loans and home equity lines of credit use the equity in your house as collateral to secure a certain loan amount. This is generally a pretty low risk venture for a bank, so it can sometimes result in lower interest rates and a fairly quick turn around time from application to closing.
Don’t assume the bank will just give you whatever part of your equity you’d like. They have strict debt-to-income ratios that will be followed. So even if you have $40,000 in equity in your house, you may only be able to get a loan for $20,000 to fund your business.
And, keep in mind with the fluctuating housing market, what was once $40,000 in equity last year may only come out to be $15,000 in equity in today’s market appraisal. So don't count on home equity as a primary source of money that you can use for day to day business expenses.
Using your home’s equity to fund your business could be just the thing to finance a big marketing campaign, hire a sub-contractor you’ve needed for a specific project, or bridge a gap in-between sources of other funding.