It can be hard to get your feet off the ground when you start a business and it’s challenging to secure a traditional business loan. Attempting to secure a bank loan is often an arduous and perplexing process. A home equity line of credit can be an effective go-to source to fund your business. As long as you have good credit, decent income, and equity in your home, you can qualify. Here are a few ways that a home equity line of credit can boost your small business.
Flexible Borrowing
When you take out a home equity line of credit, you can use the funds for any type of purpose. Home equity lines of credit can fill in the gap if you are low on funds or in times when you are waiting for clients to pay their invoices. While there are other options available such as merchant cash advances and cash flow loans, they come with higher interest rates. Also, taking the typical route of securing a business loan comes with certain spending restrictions.
Lower Interest Rates
The interest rates for home equity lines of credit are typically lower than the other options. The average interest rate for a home equity line of credit is approximately 4.78 percent while microloans are at an average of 8 to 15 percent and bank loans are at an average of 7 to 10 percent.
Home Equity Lines Are Easier
Only 15 percent of sole proprietorships secured business loans and the smaller your business is, the lower your chances are of getting approved for a business loan. Also, banks want you to produce a large amount of paperwork such as business plans, personal financial statements, and business income projections. With home equity lines of credit, you’re likely to obtain the loan as long as you have good income, good credit, and equity in your home.
The Risks
Closing Costs and Fees: With home equity lines of credit, you must pay closing costs which includes appraisal fees, loan processing fees, and title search. There are also other fees that may be associated with home equity lines of credit. You could incur inactivity fees if you are not withdrawing funds for a certain time period. If you’re thinking about paying off the loan balance early, you may be subjected to an early repayment penalty. The amount of fees you could potentially be obligated to are dependent upon the lending institution.
Interest Rate Uncertainty:
The interest rate for home equity lines of credit are not locked in at a fixed-rate. They are usually at a variable interest rate which could jump or decline contingent on market interest rates. If your interest rate is increased, you may end up with an unaffordable monthly payment. To avoid this, it’s wise to select a home equity line of credit that has a fixed-rate option.
Your Home and Business Will Be at Risk:
When you take out a home equity line of credit, your home is used as collateral until the balance is paid off. If you fall short and cannot repay the loan, your home could be foreclosed on and you could potentially lose your business.