Using Home Equity to Start a Small Business: Here’s What You Need to Know

When it comes to starting a small business, one of the things that keep people from pursuing their goals is a lack of funding. Getting an SBA loan can be very difficult when you’re first starting out and getting investors is also challenging when there is no proof of concept.

While some people can cash flow their business ideas, others need a larger lump sum to pay for specific expenses. One option that more and more entrepreneurs are turning to is a home equity loan. There are different ways to do this, but cashing out the equity in your home can provide a large lump sum for business start-up costs. Here’s what you need to know.

Start With a Business Plan

Before you even go to get a home equity loan, you’ll need a business plan. This plan should include things like your mission, vision, products you plan to sell, costs, and even marketing plans.

A robust plan is helpful because it gives you a clearer picture of how much your business will cost now and possibly in the future. It acts as a road map to help you get off the ground. You can use your business plan to help you figure out your base costs for the first year.

Determine How Much You Need

Once you have a business plan, you’ll know how much you need to get from your home equity to ensure that you have the cash necessary to launch your business from the ground up.

When you’re looking for how to get equity out of your home, it helps to know if you need all the equity or only a portion of it when you get the process started. If your home equity won’t be enough to cover your business startup costs, you can look at other options to cover the gap as well.

Look at Different Home Equity Loan Options

Did you know that there is more than one kind of home equity loan? There are HELOC loans which you can take money from, repay, and borrow from again, much like a credit card. The biggest difference is that the line of credit amount is determined and backed by the equity in your home.

There are also traditional home equity loans and even cash out refinance loans that you can use to leverage the equity in your house to pay for your small business starting expenses.

Make Sure You Qualify

You’ll need to look at factors like your income and your credit score to see if you qualify for a home equity loan. Lenders will look at several qualifying details, however, if you are current on your mortgage, not in default on any loans, and you have a lot of equity, it’s likely that you will qualify for at least a partial loan on your home equity.  

Don’t Take Out More Than You Need

Just because you can take out all your equity for your small business doesn’t mean you should. This is why it’s so important to create a business plan from the start so that you only take out what you need.

Risks of Using Home Equity for Starting a Small Business

There are risks to using your home equity for a small business. If the business doesn’t make it, you’ll still need to pay back what you borrowed on the loan. This can be expensive and put a strain on your personal finances. And if you’re not careful, taking out too much can even put you at risk of losing your home if your business fails.

Benefits of Using Home Equity to Start a Small Business

Of course, there are also benefits to using a home equity loan to fund your new business. You can often take advantage of lower interest rates and better loan terms. This means that as your business gets started, your monthly payments will be lower which can help your cash flow.

Conclusion

Using a home equity loan to fund a small business is a good option for many homeowners who want to leverage their equity in their houses. It helps them get better interest rates and better loan terms as compared to unsecured loan types.