Home equity has hit record highs. If you are a property owner, your home is likely the largest investment you have. It’s a natural place to want to go to procure a loan to fund your next enterprise. Regardless of the industry, starting a small business takes a lot of financial support to get off the ground. If you can tap into your equity, it makes sense.
A home equity loan uses your home as collateral. This puts the focus on you to succeed and generate the income from your business to repay the loan. Here is how to use home equity to fund your business.
Should you take out a home equity loan?
Business owners generally take from a home equity loan for one of three reasons for their small business. The first is to help them start a business, covering various start-up costs and inventory. The second is to grow their business, which could involve any of a number of unique expenses. The third, as we saw throughout the COVID-19 pandemic, was to help them sustain a business during downtime.
Amongst these reasons for borrowing are a lot of one-time purchases. A home equity loan can free up 80-85% of your home’s value. That can amount to a large influx of cash. This can fund sizeable one-time purchases tied to an expansion, growth, or start-up cost, ideally to initiate financial returns that can then be used to repay the home equity loan amount taken.
There are excellent reasons to think about applying for a home equity loan, presuming you are confident the amount can be paid back. You may also consider using a home equity line of credit from TurnedAway if you want an alternative way of borrowing money.
Why should you use home equity for your business?
A business can accumulate debt from various areas. If you’re being dinged with high interest rates, you may find a low-interest home equity loan will cost less and is easier to pay than tracking multiple accounts. In business when you’re trying to minimize expenses and save every dollar, annually, debt consolidation through home equity loans can easily save $1,000s.
Things happen. Supply chains break down. Travel issues arise. Inventory disruptions occur. Emergencies don’t mean the wheels stop turning, and payroll and expenses grind to a halt. Sometimes your business will need to pay emergency expenses, knowing that you can repay in preferably months. For this, a home equity loan is the gold standard. You finance it yourself, procuring the funds from a loan already set aside.
Finally, you may use a home equity loan to fund a renovation or remodel on your brick-and-mortar location. If you know remodeling will bring in more customers or result in more revenues, home equity can help you finance these sorts of large expenditures. In this sense, you are using one investment to increase the value of another investment. If you get the result you intend, it’s a win-win.
How to use home equity to fund your business
Any time you withdraw from a home equity loan, you want to have a very, very good reason to do so. Fortunately, unlike a business loan, you aren’t restricted in how you use these funds. This funding can be used very flexibly and is relatively low-interest compared to other sources of money. Ultimately, if it’s a logical step for your business and there’s a clear pathway on returning the funds, you can use home equity to fund your company’s operations.
The success of a business investment isn’t guaranteed. It is disputable how viable a reason this is for utilizing a home equity loan. That said, a lot of entrepreneurs do it. They use home equity to finance a marketing campaign, a product or service-related purchase, or new machinery. It all boils down to the rate of return and what a business owner is comfortable with. Your risk certainly increases when putting funds towards something like a long-term investment.
How can you pay back the loan?
Too much debt can sink both companies and people. Have a strong grasp on how you’ll return the amount you are borrowing. The biggest risk to you is if you cannot pay it back. A lender forecloses on your home and your business is likely also in the gutter. If you aren’t sure about returning the investment, don’t apply for a home equity loan.
The difficult thing most entrepreneurs don’t admit is that most businesses fail. Within a year, a fifth of all new businesses fail. Within three years, that rises to almost half of all new businesses. If your business shuts down and gets taken away, you don’t want the same to happen to your home. Make sure you acknowledge the risk before taking out this loan.
