If you own a home with equity in it, you may be able to use that equity to fund your business through a business purpose HELOC (home equity line of credit). It can be one of the lowest-cost options available. But it works very differently from a standard business term loan, and the risk is different too. Here's how to think it through.
How a Business Purpose HELOC Works
A business purpose HELOC is a line of credit secured by your home and used for business expenses. Like any line of credit, you draw what you need and pay interest only on what you use. Because it's backed by real estate, rates are often lower and limits can be higher than unsecured business financing.
How a Business Term Loan Works
A business term loan gives your business a lump sum that's repaid in fixed installments over a set term. Many term loans are approved mainly on your business's revenue and bank statements, and most don't require your home as collateral, although a personal guarantee is common.
Side by Side
- What secures it: A HELOC is secured by your home. A term loan is usually based on business revenue, often with a personal guarantee.
- Cost: A HELOC is often lower cost. A term loan is usually higher, depending on the program.
- How you get the money: A HELOC is draw as needed. A term loan is one lump sum.
- Speed: A HELOC usually takes longer because of the property appraisal and title work. A term loan can be faster.
- Biggest risk: With a HELOC, your home is collateral. With a term loan, the risk is to your business and your personal guarantee.
When a Business HELOC Makes Sense
- You have significant equity and a stable personal financial situation
- Your business need is real and the return is clear, like equipment that pays for itself or a proven expansion
- You want lower costs and you're comfortable with the risk
- Your business is newer and doesn't yet qualify for the best business-only financing
When a Term Loan Makes More Sense
- You'd rather keep your home completely separate from the business
- You need the money faster than an appraisal allows
- Your business has strong revenue and can qualify on its own
The Honest Question to Ask Yourself
Before using your home, ask: if this business investment doesn't work out, could I still comfortably make the payment? If the answer is yes, a business HELOC can be a smart, low-cost tool. If the answer is no, keeping your home out of it is usually the wiser move, even if it costs a bit more.
The Bottom Line
A business HELOC trades lower cost for higher personal risk. A business term loan trades a higher cost for keeping your home out of the picture. Both are legitimate options. The right one depends on your equity, your timeline and how much risk you're comfortable carrying.
Weighing home equity against a business loan?
A HeyFunder advisor can show you both side by side so you can decide with real numbers.