Why You Shouldn’t Use a Home Equity Line of Credit (HELOC) for Business Financing

If your business needs additional capital to cover its operational costs, you may assume that a home equity line of credit (HELOC) is a smart choice. After all, it will allow you to tap into your home’s equity. You can use your home’s equity to secure a HELOC. You can then use this line of credit to finance your business.� While a HELOC may sound like an attractive financing solution for your business, though, it has some serious drawbacks.

Why You Shouldn’t Use a Home Equity Line of Credit (HELOC) for Business Financing

What Is a HELOC?

A HELOC is a line of credit that’s secured using the equity in the borrower’s home. Equity represents ownership. For a home, it’s the difference between the home’s value and how much the borrower/homeowner owes on his or her outstanding mortgage.

You can use the equity in your home to secure a HELOC. A HELOC is a type of secured line of credit. As its name suggests, it’s secured using the equity in your home.

Why You Shouldn’t Use a HELOC to Finance Your Business

What’s wrong with using a HELOC to finance your business exactly? For starters, a HELOC is only an option if you have equity in your home. If you recently purchased your home, you may have little or no equity in it. As a result, you won’t be able to obtain a HELOC.

Most HELOCs have a variable interest rate. Like loans, lines of credit have either a fixed interest rate or a variable interest rate. Fixed interest rates are static and never change. Variable interest rates, on the other hand, do change. With a HELOC, you’ll face the uncertainty that comes with fluctuating interest rates.

You may initially have a low interest rate with a HELOC. But because HELOCs have a variable interest rate, it may increase later down the road. And as the interest rate increases, you’ll have to pay more to use the HELOC.

The biggest drawback of using a HELOC to finance your business is the risk of losing your home. It’s a type of secured line of credit that, like all forms of secured financing, requires collateral. The collateral used to secure a HELOC, though, consists of equity in your home. If your business experiences a dry spell and you’re unable to repay the HELOC, the lender may foreclose on your home.

This article was brought to you by Intrepid Private Capital�Group�� A Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our�website.