Utilizing Home Equity To Fund Your Business

Owning a business is an exhilarating journey filled with opportunities and challenges. One of the critical factors that entrepreneurs often face is securing financing. While small business loans and investments are common avenues, another option worth exploring is leveraging your home equity. In this article, we’ll explore the concept of using home equity to fund your business and help you navigate if it could be a viable solution for your business.

Advantages of Using Home Equity For Small Business Owners

  1. Lower Interest Rates: Home equity loans typically offer lower interest rates compared to business loans, cash advances or business credit cards, making them a cost-effective option for financing.
  2. Access to Larger Sums: Depending on your equity and lender’s policies, you can potentially access a greater amount of capital than otherwise accessible through traditional means.
  3. Long Term Capital:  With the exception of some Small Business Administration (SBA) loans, it can be difficult for a small business to secure financing terms for longer than 2 years. Most home equity loans range from 5-30 years allowing you more time to invest in your business.
  4. Tax Deductibility: In many cases, the interest paid on a home equity loan or line of credit may be tax-deductible, which can further reduce the overall cost of borrowing.
  5. Flexibility: Unlike some business loans that come with specific restrictions on how funds can be used, home equity funds can generally be used for a wide range of business needs such as startup costs, equipment purchases, or even operational expenses like paying rent or making payroll.
  6. Ease of Qualification: To secure business financing, it is common for the lender to require a minimum of two years of business history before being approved for a loan. Many look for at least $100,000 in yearly revenue as a minimum requirement for additional capital.

Risks And Considerations

  1. Risk of Foreclosure: When you use your home as collateral, you are putting it at risk. If your business does not perform as expected and you are unable to repay the loan, you could potentially lose your home.
  2. Market Fluctuations: Changes in the real estate market can affect your home’s value, impacting the amount of equity available to you.
  3. Personal Liability: Unlike business loans that are typically tied to the business entity, using home equity ties the debt directly to you.

Evaluating If It’s Right For You

Before using home equity to fund your business, consider the following:

  • Financial Stability: Evaluate your personal financial situation and ensure you can comfortably manage a new loan without jeopardizing your personal and business finances.
  • Alternative Funding Options: Explore other funding sources such as small business loans, grants, or crowd funding/angel investors to compare terms and risks.

EquityChoice As A Home Equity Solution

EquityChoice is a shared appreciation mortgage where you get immediate access of up to $500K in funds in exchange for a share of your home’s future appreciation proportionate to the amount you borrow. As a 2nd mortgage, EquityChoice allows you to keep your low-rate 1st mortgage intact. Best of all, it requires no monthly payments for 10 years, allowing you to maintain your current cash flow and invest in your business without the added pressure of interim payments on the subordinate lien.  Depending on your situation, the interest that accrues annually, but is due at maturity, may be written off as “business” interest expense in the interim further enhancing your annual cashflow.

Next Steps

Using home equity to fund your business can be a viable option for entrepreneurs seeking capital. However, it’s crucial to weigh the risks carefully and consider alternatives before tapping into your housing wealth. Whether you choose to leverage your home equity or pursue other financing, ensure it aligns with your business goals and financial capabilities.

If you’re interested in seeing how much equity you can tap into with EquityChoice, call us at 1-877-676-3934 or email EquityChoice@Newfi.com.  We are here to help you reach your financial and business goals!

 

 

This blog is for general information only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. Before making any decision or taking any action, you should consult a professional legal, tax accountant and other competent advisors who have been provided with all pertinent facts relevant to your particular situation.

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