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How Can Home Equity Loans Help You Finance Your Business?

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You may have heard of Home Equity Loans for residential situations. It may be a little harder for you to believe that you can use this type of loan for financing your business. Home Equity loans can definitely be used to buy, assist, or finance a business in many ways. Like any other Home Equity loan, you can use the fund in any way you need to, whereas with other loans you will be more restricted. Like many loans, if you can show good credit, equity, and steady income, you will be able to get the loan without a problem. Let’s take a look at Home Equity Loans and how they can help finance your business.

A Home Equity Loan For Business

You can use home equity in your business, investing your own money, and providing security for your loan. A Home Equity Loan can be used for single expenditures or other business needs but is best used for long-term investments and buying fixed assets.

A Home Equity Loan(HEL) is a good option for a business loan. You are able to take all or some of the equity in your home and use it. Usually, it is separate from your primary mortgage and with a lender who is a specialist. There are advantages to a Home Equity Loan, for example, the interest rates are often lower than business loans and other types of loans. You can also get lower interest rates if you have a good credit history. Having a credit score of 660 or higher will help you qualify for a loan. 

Using home equity loans for financing is easier than other loans, a HEL has lower interest rates, has flexible borrowing, and is able to be used by many different types of businesses.

How It Works

A home equity loan is like many other loans, but it uses your home for collateral. When you have a home equity loan, you will be given funds in a lump sum. The lump-sum can be paid over several years, up to 30 years. This means you take out the loan and then repay a bit every month over a set time. A Home Equity Loan is a term loan, and the size of the loan will dictate the amount of your monthly payments.

This type of loan has a fixed rate, loan amount, and repayment schedule.

When Should You Use a Home Equity Loan for Financing your Business?

It is recommended to have clear goals for the funds you will receive in the single lump-sum amount. You can use large equity amounts when you need one-time expenses, but you can also use it for working capital and expenses for operating the business.

Below are some examples of times when a Home Equity Loan can be helpful for your business.

  • Renovations: When you need to do some major renovations of an office or store space. Upgrades are often needed, but you need them done quickly, so the funds from the Home Equity Loan can help you get them done.
  • Purchase of new equipment: Your business can’t function without quality equipment. A Home Equity Loan can help your business get the equipment it needs with quickly released funds 
  • Startup costs: When you want to start a business, you may need more than an office and a couple of computers. You may need an office, special location, signs, inventory, and specific equipment. When you need all of these things at the same time, the funds from a Home Equity Loan can allow that to happen.
  • New Location: When you are successful and your business is growing, you may need to move your business to a new area. You will need to deal with expenses including inventory, equipment, and furnishings.
  • Buying a business: Usually, a large amount of capital is required when you buy a business. A home equity loan can be used for a down payment.

How to get a Home Equity Loan For My Business

There are just a few steps to get a Home Equity Loan. If you have any questions or need to know more, contact your mortgage lender.

The simple steps to get a HEL to finance your business:

  • Shop around: Most mortgage lenders are able to get you a Home Equity Loan, even if you have your primary mortgage at another bank. It is a good idea to see what your original lender can give you if you go through the first lender, as you can sometimes get better rates overall. As always, if you have a chance to shop around, you may find a better deal.
  • Application: A Home Equity Loan requires personal tax returns, financial statements, and a property evaluation. The evaluation will determine the property’s value and helps decide the amount you will be able to borrow. The application process can take up to 45 days till you get the funds

Pros and Cons of a Home Equity Loan

There are many pros and cons to using a home equity loan to help finance your business, so let’s take a look at what you can expect. It’s always good to know both the Pros and Cons of a loan. It helps you see if it suits your situation.

Pros

  • You don’t need any business collateral
  • Home Equity Loan is less expensive than other loan options
  • You can use a Home Equity Loan for starting up a business-type
  • HEL is easy to qualify
  • You can borrow large amounts
  • Low-interest rates
  • Long repayment period
  • Cons
  • You can lose your home if you don’t make payments
  • Home Equity Loan is attached to your home
  • You need personal credit to be approved.
  • You have to be a homeowner to use Home Equity

What Does your Business need to Qualify for a Home Equity Loan?

There are a few common things you need for your business to be financed with a Home Equity Loan.

  • Your Debt-to-income Ratio can go to 50%, although most lenders will allow up to 43%
  • You need to have a credit score of 660 or more
  • You will need 10% to 20% of home equity

If you are Self-Employed

Often when you are self-employed, lenders are very reluctant to give you loans or other financing solutions. This is usually because proof of income can be difficult to show and you may not have the number of company accounts the lenders want to see. Since a home equity loan uses your home to secure the loan, lenders are more willing to work with self-employed borrowers.

Contact your mortgage broker today if you have any questions about using a Home Equity Loan to finance your business. It is always better to discuss your financial goals with your mortgage lender so you can get the correct loan for your financial situation. Mortgage brokers will be able to find you the right loan for your situation. You can count on their experience to help you do the best for your business.

So, get that inventory, expand your business or upgrade your equipment easily and stress-free with a Home Equity Loan.

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