If you're a small business owner, then there are two things that you're probably always after: time and money. Indeed, financing your daily operations requires money, and building a solid reputation in your sector will take time. When applying for financing, lenders take these two into consideration to approve or decline loan applications. Since traditional business loans are becoming harder to obtain, entrepreneurs are considering alternatives such as home equity loans. Here are a few reasons why.
Defining home equity loans
Home equity loans allow entrepreneurs, who also happen to be homeowners, to borrow money based on the value of their house. The same thing also applies to individuals whose company has equity. They are subdivided in two categories: standard home equity loans and home equity lines of credit (HELOCs).
Advantages of home equity loans
- Predictability of the periodical payments
- Flexibility of the amounts borrowed
- Low interest rates
- Tax deduction
With standard home equity loans, you know exactly how much you have to pay for each period. This means that you'll never receive a letter from your lender stating that your monthly payments are going up for some reason. Additionally, this source of financing gives you the opportunity to borrow additional money even after the initial disbursement, which is impossible with traditional business loans. Also, you're not restricted as for how you spend the funds borrowed.
Another significant benefit of home equity loans is their low interest rates. This is because lenders have a good idea of the market value of the guarantees included in the contract. Finally, home equity loans enable you to deduct the interest rate payments you made when filing your taxes.
Drawbacks of home equity loans
- The fact that the company or the house is on the line
- Exposure to interest rate fluctuations
In exchange for being assessed a low interest rate, you'll have to put your house title or business on the line. If anything goes wrong as you're repaying your debt, you'll lose the former or the latter. If you opt for HELOCs, then you'll be exposed to interest rate variations. More specifically, your interest payments will be calculated based on the prime rate. If this rate goes up, your payments will increase, and vice versa. One way to mitigate this risk is by negotiating a HELOC with a fixed rate.
It seems pretty clear that home equity loans offer more advantages than traditional business loans. Which type of home equity loan will be best for your company depends on your needs. Contact MCS Bank for more information.