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You are here: Home / Cash Flow & Finance / Is a Home Equity Loan How You Should Fund Your Business?

Is a Home Equity Loan How You Should Fund Your Business?

October 30, 2012 By Melinda Emerson 1 Comment

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Is a Home Equity Loan How You Should Fund Your BusinessA big business idea without funds is pretty similar to a new car with no petrol. Luckily, there’s an extensive range of sources available to you for funding your new business enterprise. When it comes to small business, one of the biggest challenges to succeed is finding sufficient money for start-up or sequential development. Entrepreneurs, especially new ones, strive to collect the funds they require without an established record of success.

A lot of people dream of initiating a business of their own; however, very few are truly able to turn their dream into reality as they’re often turned down by business loan lenders. The monetary expenses of initiating a business are quite huge and this could be a tough challenge for any business holder. The financial institutions that principally deal in giving out business loans generally necessitate thorough depiction and computation of the preliminary costs, a sound business plan, selling ideas and expected profit-loss estimation ahead of providing you with a loan. In case you’re somebody who has already experienced the harassments of such tricky business loan lenders, you have the option of leveraging a second mortgage and make use of the returns to fund your new business venture. If you have a sound credit score and proof that you’re capable of making your monthly payments on time, it’ll be much easier to obtain a home finance loan in comparison to a business loan.

Home finance loans – What are the types?  Generally, there are two ways to take out home equity loans and use the returns for establishing your new business organization. The first option is to take out a second mortgage, and the second option is to go for cash-out refinancing. Both these methods will enable you to obtain extra funds and use it for the purpose of business financing. The funds that you receive from these resources may be used for any monetary purpose and thus, you needn’t have any particular plan to be eligible for such kind of loan.

The very fundamentals of obtaining a second mortgage.  A home equity loan is also known as a second mortgage and you obtain this loan by making use of the equity that you’ve built on your home. For example, if your current home value is $300,000 and your first mortgage loan amount is $250,000, the home equity value is $50,000 and you may obtain a loan of this amount. Since you’re placing your house as collateral for such a loan, you need to remain cautious and stay regular on your payments.

Cash-out refinance loan – How to use it?  If you want to make use of a home loan for financing your new business, you may opt to refinance your current mortgage loan for a sum that’s in excess of what you actually owe on your home loan; the excess funds can be used for business purposes. This is commonly recognized as cash-out refinance and you need to make certain that the lender consents to a cash-out refinance policy when the overall debt on your home loan is either equivalent to or below 80% of the home value.

If you’re intending to launch a new business and finances are tight, you have the option of using these home funding options, but there are some disadvantages too. Chances are that you may later fail to pay the monthly installments on time; thus, it’s important to have a solid financial plan. Moreover, since you’ve placed your home as collateral, there’s always a risk of losing your home to foreclosure. Hence, it’s advisable to consider your business objectives and repayment affordability ahead of using a second mortgage or a cash-out refinance loan.

About the Author:  Ana Larson is the Community Mentor of MortgageFit and has been contributing her
suggestions to the Community since 2005. Not just that, she has written many articles on mortgage, credit card, small business loans, etc.

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Filed Under: Cash Flow & Finance, Guest Articles Tagged With: financing options, funding a small business, small business tips

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Melinda F. Emerson, “SmallBizLady” is America’s #1 Small Business Expert. She is an internationally renowned keynote speaker on small business development, social selling, and online marketing strategy. As CEO of Quintessence Group, her Philadelphia-based marketing consulting firm serves Fortune 500 brands that target the small business market. Clients include Amazon, Adobe, Verizon, VISA, Google, FedEx, Chase, American Express, The Hartford, and Pitney Bowes. She also has an online school, www.smallbizladyuniversity.com, that teaches people online marketing and how to start and grow a successful small business and publishes a blog SucceedAsYourOwnBoss.com. Her advice is widely read, reaching more than 3 million entrepreneurs each week online. She hosts The Smallbizchat Podcast and is the bestselling author of Become Your Own Boss in 12 Months, Revised and Expanded, and Fix Your Business, a 90 Day Plan to Get Back Your Life and Reduce Chaos in Your Business.

Comments

  1. Patrick McFadden says

    November 1, 2012 at 6:09 pm

    I have a bootstrapper mentality so for me if you have to have a loan to make the business work I think you’re in trouble. I feel if you start with borrowed money – it creates an artificial environment that prevents you from really knowing how the business works. The struggle to make it profitable from day one will help you build something that has true potential.

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