Home Equity to Finance a Start-up
BY: MEGAN TOTKA ON FRIDAY, OCTOBER 28, 2016
There are many great reasons to start your own business, but since 99.9% of start-ups need at least some capital, a lack of funding discourages many people. It’s not all that easy to secure lending from a bank these days, so unless you have a deep pocket or a healthy savings account, your ideas might never see the cold light of day. However, if you are a homeowner, there is another answer.
Plenty of people use home equity to finance various larger projects such as a new kitchen or extension. Borrowing against the equity in your home is a quick and easy way to secure money at a low rate of interest. Lenders are usually happy to let homeowners borrow money against home equity because it’s low risk for them. If you default on the repayments, they can take your home away. For obvious reasons, it is sensible to compare home owner loans before making a decision.
Different Types of Home Equity Loans
There are two types of home equity borrowing.
The first is where you borrow a fixed sum of money and agree to make fixed repayments to the lender. For example, say you borrow $40k over five years, if you keep to the repayment schedule, in five years’ time you have repaid your debt. If you need to borrow money for a fixed purchase, for example some machinery, then a fixed term loan will suit you, but if you need credit for cash flow purposes, there is another way.
A HELOC loan is a home equity line of credit. This works in a similar way to a credit card, but you are borrowing against the equity in your home instead of a credit balance offered by the lender. You will still have to pay interest of course.
Is a Home Equity Loan Right for Your Business?
Home equity loans are useful if your business needs money, but they are not always the right solution. Interest rates can go up as well as down, so you could end up being caught out if the lender raises the interest rates on your HELOC loan. There is also the risk that your property falls in value and there is less equity to borrow against.
Before borrowing against the equity in your home, read the small print. Find out whether the interest rates are fixed and how much the repayments are going to be. Do prepare a cash flow forecast to determine whether the business can afford the repayments. It’s pointless borrowing money for a business if you have no income to make the repayments.
Is the Loan Tax Deductible?
Check with your business tax adviser whether the interest you pay on the home equity loan is tax deductible; it may not be, so don’t assume this is the case until you know for certain.
Borrowing against the equity in a property is a useful source of cash for a business, but if you run into financial difficulties further down the line it is a decision
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