When starting a new business venture, most entrepreneurs’ first thought is to turn to a bank for a business loan. However, most banks have a preference to lend to established businesses, which often creates a catch-22 for start-up business owners. Such strict limitations on business loans often drive entrepreneurs to other avenues to secure capital funding. The flexibility and ease of a Home Equity Line of Credit provide the best solution to this funding dilemma!
For many entrepreneurs, a HELOC can help fuel their small business possibilities. Small companies frequently use home equity loan products as capital for the early stages of their development. The HELOC is often preferred because it operates similar to a credit card, has flexible low interest payments, and offers tax benefits.
Let’s take a brief look at how a HELOC functions for a small business:
Home equity line of credit (HELOC): This works more like a credit card, as you’ll have access to a set amount of money and can draw down funds whenever you need cash. You then re-borrow and repay it as many times as you want during the draw period, and you won’t be charged interest until you withdraw funds. Keep in mind that the interest that is charged will most likely be a variable rate, which means interest costs can go up or down depending on the Prime Rate.
A HELOC is an easy and simple solution to secure the funding you need for your small business. The three main advantages to a HELOC are flexibility of borrowing, lower interest rates, and the interest may be tax-deductible (always consult a tax advisor when researching this option). As with all easy solutions, there are some drawbacks to consider with this loan product.
Some points of interest to note when evaluating HELOC products are the level of risk to the home and business, closing costs and fees, and risk of varying interest rates. All facets of the line of credit must be evaluated by not only the business owner, but also a trusted financial advisor to ensure this product best suits the business’ needs.
The best use of a HELOC is to consider it as a short-term method of funding. Use it to obtain property, or a piece of a business. When your business is underway and doing well, use the assets of your company as collateral to obtain a business loan. You’ll then eliminate the risk of losing your home should you go into default on the loan. The business loan generally comes at a better interest rate, and can be used to pay off the HELOC.
If you are confident in your ability to repay the loan, using a home equity loan or a HELOC comes with numerous benefits that can help you grow your business.
But no matter which financing route you choose, always remember to shop around for the best deal, comparing loan terms, fees and interest rates, and read all of the closing papers carefully. These tips will ensure that you are choosing the correct product solution for your needs to create endless possibilities for your start-up business!