Why You Can Trust the MarketWatch Guides Team
Here’s a breakdown of how we reviewed and rated top home equity lenders
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Providers MonitoredOur team researched more than two dozen of the country’s most home equity lenders, including large companies like Navy Federal Credit Union, U.S. Bank, TD Bank, Third Federal and Spring EQ.
640
Data Points AnalyzedTo create our rating system, we analyzed each home equity lender’s disclosures, licensing documents, marketing materials, sample loan agreements and websites to understand their loan offerings and terms.
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Loan Features TrackedOur team regularly collects data on each company’s loan offerings and terms, such as minimum and maximum loan amounts, origination fees and discounts.
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Professionals ConsultedBefore we began our research process, we consulted with financial advisors and industry experts to ensure our evaluations covered the banking product aspects that matter most to potential customers.
Understanding HELOCs for Business
A home equity line of credit (HELOC) is a line of credit that uses your property as collateral. If you stop making payments or default, the bank can seize your home and start foreclosure proceedings.
With a HELOC, you receive a total line of credit that you can draw down and pay back. The draw period usually lasts 10 years. Once the draw period is over, you will enter the repayment period. This can last around 20 years.
Homeowners often use a HELOC for home repairs or remodeling projects or to pay off other high-interest debt. Even though many consumers believe that you can only use HELOC funds for personal use, there are no restrictions on using a HELOC for business expenses. In fact, you can use the money to start a business, buy new supplies or machinery, pay contractors or employees and more.
Pros and Cons of Using a HELOC for Business
If you’re debating whether or not to use a HELOC to help out your business, there are multiple factors to consider. We’ve broken down the pros and cons below:
Pros
You can take out a large sum of money.
There are few restrictions on how you can spend the funds.
You don’t need to meet strict business requirements to qualify.
Cons
There is a risk of losing your house.
You can’t take a tax deduction on interest.
The loan amount is limited to your home’s value.
HELOCs may come with variable interest rates, which can go up.
Should You Use a HELOC for Your Business?
If you’re trying to decide whether taking out a HELOC for your business is a good idea, here’s what you need to understand before making that decision.
Factors To Consider
When making this decision, the most important factor is deciding if your business can afford to repay the loan. Look at your business’s total cash flow and consider its future revenue projections.
Remember to be realistic, not optimistic, when looking at these figures. If you assume your business will make more money than it actually does, you may find yourself in trouble when it’s time to pay back the HELOC. If you have an accountant or business consultant, it may be useful to ask them how likely you are to pay back the potential HELOC.
Making the Decision
You also need to determine how soon you need money for your business and if there are other opportunities to take advantage of.
For example, can you apply for some small business grants before taking out a HELOC? Are there other business funding options that may have similar interest rates but don’t require using your home as collateral? Can you start your business while still working your current job so there is at least some cash flow coming in?
Those who take out a HELOC and end up defaulting and losing their home don’t consider this potential reality until it’s too late. If you own your home with a spouse or partner, you should talk to them and make sure they also understand the risk.
HELOC vs. Home Equity Loan for Business
A HELOC and a home equity loan are two of the most popular ways you can use your home’s equity as an alternative form of financing. Whereas a HELOC gives you a line of credit you can draw upon as needed, a home equity loan provides a lump sum upfront. Once you have spent that lump sum, you would need to take out another loan if you ran short of money.
With a HELOC, you can repay the money to your credit line and then borrow it again as long as you’re within the draw period. Many consumers prefer the flexibility of a HELOC for this reason. Make sure to compare interest rates and fees between HELOCs and home equity loans to see which one makes more sense for you.
Interest rates on HELOCs and home equity loans may differ, with HELOCs often having lower interest rates. However, HELOC rates are often variable, while home equity loan rates are typically fixed. Regardless of which option you choose, determine what your monthly payment might be to ensure you can afford it.
Alternative Financing Options for Business
Before using a home equity loan or HELOC, you should consider other options, like the following:
Traditional Business Loan
A traditional business loan is given by a bank or credit union and may be either secured or unsecured. Terms for business loans can last between one and 10 years. However, the term depends on the loan amount, lender and other factors.
You can get a business loan from a brick-and-mortar bank, credit union or online lender. Make sure to compare repayment terms, interest rates and fees. These loans may require some form of collateral, especially for less established businesses.
Business Credit Card
A business credit card is like a regular credit card that offers special rewards for business owners, like cash back on relevant expenses. A business card may be one of the easiest types of funding to get as a business owner, especially a new one.
Some business cards even have special 0% APR promo offers where you will not be charged interest on purchases or balance transfers, depending on the card. You will not accrue interest on your balance as long as you make your minimum payment.
Small Business Administration (SBA) Loan
A Small Business Administration (SBA) loan is a small business loan that is backed by the SBA and given by third-party lenders.
SBA loan amounts start from as little as $500 and go as high as $5.5 million. Unlike other types of business funding, many SBA loans do not require collateral. Lenders that offer SBA loans must respect the SBA maximum interest rate. These rates may be competitive with non-SBA loans.
Outside Investor Funding
Getting someone to invest in your business looks easy on “Shark Tank.” However, the reality is a little more complex. Finding outside investors can be much more complicated than simply taking out a business loan or HELOC, but it’s an option worth considering. You may have to let the investor become a part owner of the business, giving up some of your equity, but this depends on the particular terms you agree to.
Crowdfunding
Creating a crowdfunding campaign can be hit or miss. If your idea is popular, you may be able to raise a lot of money and reach your goal. However, you may miss your goal if your idea fails to interest people.
If you set up a crowdfunding campaign, you have to market it well to attract investors. Plus, most businesses provide some kind of reward for backers, like early access to a product or a special discount code later on.
Invoice Financing or Factoring
If you’re waiting a long time for invoices to be paid, you may be able to use invoice financing to help your cash flow. With invoice financing, a third-party lender will pay a portion of your invoice. When the original customer pays the invoice, the funds will go to the third-party company.
If you use invoice financing or factoring, make sure to compare the fees across various providers. In some cases, you may only receive 70% of the invoice amount. Before going this route, you can try to add more stringent payment terms or include a late fee past a certain date.
While you may still be personally responsible for guaranteeing these loans, you will not have to put your home up as collateral.
The Bottom Line
While there are many ways to find business funding, a HELOC can be an attractive option for several reasons. They’re relatively easy to obtain, can have lower interest rates and offer potentially high loan amounts, depending on your home’s value.
However, be careful before using a HELOC. Losing your home is a real potential consequence of a default, so take this loan seriously. Be smart about how much you borrow and track all due dates and repayment periods. Make sure you’ve considered other options before deciding whether a HELOC is your best choice.
Frequently Asked Questions About HELOC for Business
According to the IRS, you are only allowed to deduct the interest on your HELOC if you use the funds on your home. The interest is not deductible if you use the funds for any other reason. Also, you must still itemize your deductions to qualify for the tax break. If you take the standard deduction, the interest is not deductible, no matter how the money was used.
If you’re applying for a traditional business loan and need to provide collateral, you usually can only use property that is owned by the business. If your business doesn’t own any property, you may be able to use inventory, supplies, equipment and other business items as alternatives.
Business owners may qualify for unsecured lending options, like business credit cards or unsecured loans. Like unsecured personal loans, unsecured business loans may have higher interest rates or more stringent criteria than secured loans.
Whether you need to provide collateral for a business line of credit depends on the lender. If you’re a relatively new business or have a low record of revenue, you may be required to put up collateral for a business line of credit. In some cases, you can use your business equipment or inventory as collateral. However, this depends on the lender’s policies and requirements.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someoneyou trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
Zina KumokContributing Writer
Zina Kumok has been a freelance personal finance writer for almost 10 years. A trained journalist, she has covered everything from murder trials to the Final Four.
Jen Hubley LuckwaldtEditor
Jen Hubley Luckwaldt is an editor and writer with a focus on personal finance and careers. A small business owner for over a decade, Jen helps publications and brands make financial content accessible to readers. Through her clients, Jen’s writing has been syndicated to CNBC, Insider, Yahoo Finance, and many local newspapers. She is a regular contributor to Career Tool Belt and Career Cloud.
