Barry Levine received a $200,000 loan about 15 years ago to use as he pleased. He had to simply bet that he could repay the loan.
La Jolla, Calif.-based entrepreneur, and his wife, planned to use funds from the home equity loan of credit (HELOC), which is backed by equity in a home, for the expansion of Sperry West, his temperature-reading camera-making company. He also hired a professional marketing manager, three salespeople, and a vice president of sales.
“We lived in our house for 25+ years. Levine states that they don’t plan to purchase a new house. “Why did this happen?” We took out an equity loan, and the mortgage was too high. We were not going to pay the mortgage unless the business was doing well.
Are HELOCs a good idea for your business?
There are negatives to using a HELOC in your business: if you fail to pay the monthly payments, your house could be at risk.
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Foguth Financial Group founder Michael Foguth says that personal collateral can be risky if you need money for your business. If the business fails, it will also take your personal finances with it. A HELOC is an option when all other options for business lending have been exhausted.
Foguth says that HELOCs are more popular than ever due to current economic conditions. Many businesses are suffering from the COVID-19 pandemic. Home prices have risen dramatically and lenders are more willing to take credit files. This creates “almost an perfect storm.” So why is a HELOC so attractive?
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Sheraz Iftikhar is the president and CEO at Arch Global Advisors. She says that applying for a HELOC can be simple and funds are not monitored. This means you can use the funds for whatever you want. “Using a HELOC for your business start might be a good idea depending on your current situation, long-term goals, and other factors. However, financial experts advise you to weigh the pros and cons before making a decision.
Alternatives to using a HELOC in Your Business
- There are many options for business owners who don’t want to risk their home on their business.
- Foguth states that now is the best time for businesses to borrow funds.
There are loans available from the Small Business Administration. These include temporary programs like the Economic Injury Disaster Loan. Foguth claims that the loan offers a 3.75% rate for 30 year. Many business grants are also available.
There are also traditional funding options such as personal loans and small business credit cards.
Iftikhar explains that these are very similar to HELOCs because your home is used as collateral. However, the fixed rates are usually higher than HELOC rates. Also, there are set deposits. You should compare terms, rates, pros, and cons of each option, as well as the consequences for defaulting. You can consult a financial advisor or broker if you are overwhelmed by all the options.