Entrepreneurs universally are looking to fund the considerable start-up and operating expenses that come with starting a business. If you are looking for funding sources, is using your home equity a good option?
There are pros and cons of using home equity to fund your small business. Here is a look at a few of those factors.
First, it is important to understand the several ways in which you can leverage a home mortgage for cash. The first is by taking out a second mortgage on the home itself. The second is to refinance an existing home loan and taking cash out that can be used for other purposes. A third is to create a home equity line of credit (HELOC) that is essentially a credit card with which you tap into a portion of the home’s value to borrow money. There are pros and cons for each option, and any of them can provide you with the necessary funding, provided you meet the criteria.
But, while using your available home equity may seem like a good idea, is it the best way to fund your small business? Here are a few questions to consider with your financial advisor:
- What will your monthly payment be? With additional debt, you will incur increased personal expenses at the same time you are starting your business.
- What are the tax implications? Does refinancing a mortgage or taking a second mortgage give you an opportunity to lower your tax bill? Mortgage interest payments are deductible on your federal income taxes in most cases.
- What are the rate terms? Depending on your credit and the loan type, some home equity financing may involve variable interest rates. That means, after a certain period, the lender may raise the rate, often more than once. Are you ready to absorb higher payments later?
- What is the backup plan? If you have other needs for emergency cash, having home equity available is a good way to protect yourself. If your equity is already tied up in the business, what will you do in such situations?
- What is your cash flow? With new debt, will you have enough cash available to meet your personal and professional obligations?
- How soon can you pay it back? One advantage of home equity loans is that if you pay them back quickly (and will not be assessed an early payback penalty), you can leverage your home’s value to fill a stopgap and help get your business off the ground.
- What are property values like? You want to know what your home is worth on the open market. Will you be able to recoup having a second mortgage should you need to sell your home in a few years?
One of the most troubling potential results of using home equity to finance your business is the possibility of loan default. If cash flow issues should make it impossible for you to repay your home equity loan, you might find yourself in foreclosure. This possibility, however remote, keeps many entrepreneurs from choosing this funding option.
A Better Solution
Many entrepreneurs have found a better way to fund their dreams by turning to Benetrends, a trusted partner for your business needs. Benetrends pioneered a program whereby you can leverage your 401(k) and IRA retirement funds to get the class flow you need to start your business. Using your 401(k), you can have the cash you need in a matter of days without incurring tax penalties or early withdrawal fees. To learn more, watch the webinar: How To Use Your Retirement Funds To Buy A Franchise Or Business.