Using Home Equity For Business Purposes

[Feb 17, 2009.]

 

A recent column on WashingtonPost.com tackled a question many small business owners wind up asking themselves. Should you leverage your home's equity for business purposes?

The column told the story of Rebecca Malik, a young woman who started an online furniture store less than one year ago. In order to grow her business, Rebecca needs access to capital to spend on marketing and inventory.

One option she is exploring is tapping the home equity her and her husband have in their two-bedroom condo.

Home equity loans and lines of credit can be very appealing for small business owners. Often times the approval for such a loan is quick. If the borrower has good credit and sufficient income and equity, the terms can be very attractive as well. With the Prime rate sitting at 3.25 percent, the interest cost of borrowing against one's home equity is very low. A home equity line of credit can also provide a lot of flexibility with regards to managing the debt. Money can be borrowed, repaid, and made available to be borrowed again.

The WashingtonPost.com column does a good job of discussing the drawbacks for using home equity as well. The primary drawback is if the business fails or real estate values drop, the business owner may be putting their primary residence at risk.

According to Mark Avallone, president of Potomac Wealth Advisors in Rockville, "Borrowing against home equity is risky because a residence is a special place and to put it at risk for a yet unproven business venture could lead to a difficult personal situation," Avallone said. "Even before this credit crunch we urged clients not to over-leverage their home."

As an alternative, small business owners can explore unsecured small personal loans, a business loan with a bank, vendor financing, or even programs offered by the Small Business Administration (SBA).

 

About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.