Should You Mortgage Your Home To Get A Business Loan?

For as long as I can remember, starting your own business has always been a vital part of the American dream. The United States is home to over 31.7 million small businesses, which means that millions of Americans have realized their dreams and went into business for themselves. However, the ability to obtain the necessary start-up capital for a business can prove to be somewhat difficult. One option that more and more people are considering is 2 mortgage their homes to secure a business loan, but is worth the risk?

Depending on your financial situation, it can be a good idea to mortgage your home to secure a small business loan. However, should you choose to mortgage your home to finance your business, you must be aware that you are offering your home as collateral. The biggest risk associated with using your home as collateral for a business loan is that you run the risk of losing your home if your business does not succeed.

 In this article, we compare the differences between getting a home equity line of credit and getting a small business loan. We will also examine the types of businesses that you can start through a home equity line of credit. Finally, we will also take a look at the pros and cons associated with mortgaging your home to obtain a small business loan.

What Are the Differences Between Home Equity Lines of Credit and Small Business Loans?

The biggest difference between a home equity line of credit and a small business loan is that the line of credit is a second mortgage, although both must be repaid in full. The money is given to you in a one-time lump sum and then is repaid monthly as an attachment to your current mortgage. There are also very few regulations that dictate how you are allowed to spend the funds obtained through a home equity line of credit. It helps to think of a home equity line of credit as a credit card, in which the interest rate can fluctuate depending on the market.

On the other hand, a small business loan is an entirely different scenario altogether. Small business loans are to be used exclusively for either purchasing a small business, infusing money into an existing business, or starting a new business. There is very little fluctuation in how you can use the funds you secure through a small business loan, while there are very few limits to how you can use the home equity line of credit. However, small business loans typically have a fixed interest rate that is usually lower than the interest rate you would get through a home equity line of credit.

What Are the Advantages of Securing a Home Equity Line of Credit?

The biggest advantage to securing a home equity line of credit is the flexibility in which you are allowed to spend the funds. You may choose to spend the money you obtained from a home equity line of credit in any manner you wish, while there are several restrictions and conditions on how you can spend financing secured by a small business loan. For many future business owners, this is reason enough to skip the small business loan application and go straight for the home equity line of credit.

Another reason that you may want to consider a home equity line of credit as opposed to a small business loan is the fact that the interest that is crude through a line of credit is tax-deductible. You are allowed to deduct up to $100,000 of Interest on a home equity line of credit from your taxes, or up to $50,000 if you are single or married filing separately. Whereas, the interest accrued from a small business loan may not be tax-deductible.

What Are the Disadvantages of Securing a Home Equity Line of Credit?

The single biggest disadvantage of obtaining a home equity line of credit to start a small business is the collateral that you are required to put up to secure the loan. If the worst possible scenario does happen, you could end up losing your house if you decide to use its equity to venture out into the exciting world of small business ownership. Again, this is where it would pay huge dividends to do your research and become familiar with the market in which you plan to start your business.

Another disadvantage to using your home’s equity to secure startup capital for your business is that a bankruptcy court and not discharge a home equity line of credit as they can do for a small business loan. Nobody wants to go into business thinking that the worst can happen, but you must prepare yourself for the worst possible scenario. If your business does go bankrupt, your home is still safe if you got your financing through a small business loan. The same cannot be said if you use a home equity line of credit.

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What Type of Businesses Can You Start With a Home Equity Line of Credit?

One of the most important factors that will determine the type of financing you choose to start your business will be the type of business that you plan to open. Perhaps the main question that you need to ask yourself is if the potential for success is worth risking your home. For many people, the answer to this question is a resounding “no.” However, for some people, the potential for future success is enough to convince them to take that plunge. This is why you must know the demands of the market in which you live.

Starting a business in the service industry is usually the best bet if you plan on mortgaging your home to secure the necessary finances to get your business off the ground. The biggest reason for this is that you do not want to gamble your home on selling goods that people may not want. By going into the service industry, you are not using your home equity to finance expensive inventory that may not meet the demands of the public. Service Industries have little to no overhead or inventory, which makes them a minimal risk.

Several businesses are found in the service industry, which is always in demand, no matter what the economy is like. While there is no such thing as a sure thing when it comes to starting a business, cleaning businesses have little to no overhead and do not require you to carry a large stock of inventory. Another great idea for a business that is usually recession-proof is to open either a salon or a barbershop. These are services that people will always need, which means that you should not have much trouble repaying the loan.

Conclusion

 If you are planning to start a business, you can either secure a home equity line of credit, or you can obtain a small business loan to get the necessary start-up capital you need. However, there are a few key differences between small business loans and home equity lines of credit. The biggest difference between the two is the restrictions that can be put on how you are allowed to spend funds secured through a small business loan, while there are little to no limitations put on how you are allowed to spend your home equity line of credit. By choosing to finance your business through a home equity line of credit, you are agreeing to use your home as collateral. This is not something that can be discharged in bankruptcy court.

Another key difference between these two is the interest rate. Small business loans usually have a lower interest rate, and the interest rate is also fixed. Home equity lines of credit have a variable interest rate that can fluctuate with the market. If you are going to use a home equity line of credit to start a business, your best bet will be to start a business that is in the service industry. This is because there is relatively no overhead, and very little inventory required to start a business in the service industry. A couple of examples of these businesses would be barbershops or cleaning businesses. Now that you are aware of your financing options, it’s time to go out and realize that dream of starting your own business.

Frequently Asked Questions

What are some of the best small business loans you can use to start a business?

When it comes to starting a business, there are several options from which you can choose to secure your financing. If you decide to apply for a small business loan, here are some of the best ones available per Funding Hero:

• LendingTree
• Biz2Credit
• Torro
• Fora Financial
• Credibly

What are some of the factors that go into determining how much it will cost to start a small business?

Unfortunately, there is no one-size-fits-all answer to this question. One of the major factors that determine the amount you will need is the type of business you plan to open. However, according to Business News Daily, here are a few things that factor into how much it will cost to start your small

• Web hosting and other website costs
• Rental space for an office
• Office furniture
• Labor
• Basic supplies
• Basic technology
• Insurance, license, or permit fees
• Advertising or promotions

Please note that the contents of this blog are for informational and entertainment purposes only and should not be construed as legal advice. Any action taken based on the information provided in this blog is solely at your own risk. Additionally, all images used in this blog are generated under the CC0 license of Creative Commons, which means they are free to use for any purpose without attribution.