Can a HELOC, Home Equity Line of Credit, Be Used for a Business
Article summary: It is possible to get a HELOC as a way to raise business capital for your company. Still, you should know that there are advantages and disadvantages of using a HELOC, home equity line of credit, for your business.
- How will your spouse and family be impacted by this decision?
- Getting a home equity line of credit may affect your business relationships.
- Why the new tax laws may change your mind.
- Learn all the advantages and disadvantages before you choose this option.
What Are the Biggest Issues When Getting a Home Equity Line of Credit?
1. You are taking on all the risk. If you have a business partner, he or she may not be able to get a HELOC. This means it’s only your home and security on the line. Also, even if your business closes, you still owe the money. And any former business partners you may have are under no obligation to help you.
2. This is a decision that involves not only your business, but your spouse and family as well. You have to make the case that your business is worth taking a gamble that could cost you your home. While your spouse may benefit from the money your business makes, it’s still never an easy or pleasant conversation to have.
3. There are new tax laws that now make this a less favorable option. Under the new Tax Cuts and Jobs Act, a home equity line of credit used for your business is no longer tax deductible. It is only deductible if you use the money to make improvements on your home and lenders are very strict about making you show exactly how the money gets used.
Okay, now you know some of the risks. But you still need a fast business loan. So, what other options do you have?
Are There Any Alternatives to a Home Equity Line of Credit?
Warning you about the dangers of a HELOC means nothing without also discussing some solutions. Fortunately, there are other financial products you may be able to apply for without losing your shirt (or your home).
Small business loan – this is typically what most business owners think of first when they need business cash now. However, this is next to impossible to get from a bank. A bank will always demand collateral, which most small businesses just don’t have. And if your credit is not exceptional, these loans are also expensive.
Business credit cards – not really the best way to finance a business, but it is an option. One of the biggest advantages is that they are an easy-to-get type of unsecured, revolving small business funding. Conversely, you will not be able to get the kind of cash you need to help your business. For one thing, the interest rate on cash advances from a business credit card is significantly higher than when you make purchases. You will also pay excessive fees and there is no grace period.
Business line of credit – if you are looking for a short term business funding option that is quick and relatively painless, this is an ideal answer. With a business line of credit, you can usually get your money in a few days but you pay nothing until you actually withdraw funds.
At Financing Solutions (www.financingsolutionsnow.com) their product is designed specifically to help the small business owners of companies with under $5 million in annual revenue. Best of all, they don’t report to the credit bureau (unless someone defaults) and they don’t require a personal guarantee.
Also, all partners in the business are on the hook equally for repayment. Therefore, this option is much better than a home equity line of credit.