How to use Home Equity to Finance your Business

Owning and operating a company is a huge responsibility. Small business owners spend hours managing their company's finances, working on making marketing campaigns successful, and trying to beat their competition. It's tough, but being a small business owner can be very fulfilling when you are able to couple ingenuity with industry to launch your company to success.

Eventually, whether you are a small business owner who is just starting out, or you have been managing your company for years, you will find yourself needing the funds to expand your business. It helps if you have some money available in your savings account —but your business will probably need more than just a few thousand dollars that you have stored away in your bank account.

You could try for a small business loan, but most commercial banks are hesitant to lend to small business owners because they will be unlikely to see a good return on their investment. One kind of loan that small business owners can make use of is the home equity loan.

Home equity loans:

Use the loan-borrower's home ownership as collateral
Is easier to obtain than a small business loan
Has more options than a small business loan

In a home equity loan, the borrower uses his or her ownership or partial ownership of a home as collateral for the loan. This way, if they are ever unable to repay the loan and default on their payments for some reason, the financial lender will seize the home and sell it to make up for the debt.

There are two kinds of home equity loans. The first is the traditional home equity loan in which a lump sum is given to the borrower and it is repaid in installments plus interest. The second kind of home equity loan is the revolving line of credit loan. This loan acts in much the same way as a credit card. The limit of the loan is tied to your home's equity, and interest is to be paid on the outstanding principal.

In general, the interest rates on these loans are significantly lower than those placed on credit cards, and your savings account. The size of these loans varies from one financial institution to the next. But most banks will use a loan-to-value ratio when they are trying to figure out how much money to lend to a person.

In the loan-to-value ratio, the bank will look at the amount of money that you owe on your home and compare it to the value of the home, itself. Most banks feel safest about loaning money to individuals who owe less than eighty percent on their house payments.

Home equity loans can be a great way to finance your business, but there are a few things that you need to take into consideration before you apply for one. Will the loan come with an adjustable interest rate? How will the loan influence the way you manage your taxes? How much debt do you owe right now? What are those debts for? Will you be able to meet the payments on a home equity loan?