Are Home Equity Loans A Good Way To Finance A Startup Company?

by Debi Enders

Starting a new company can be risky. According to the Small Business Administration, just two out of three new companies survive their first two years in business. Only one in three lives to celebrate its 10th anniversary, reports the U.S. Bureau of Labor Statistics.

Banks understand these risks. That’s why most are reluctant to approve loans to fund business startups. That’s also why banks require detailed business plans that explain how loan funds will be used and repaid.

The hurdles to home equity loan approval, on the other hand, are much lower. For some small-business owners, these loans can be a good source of startup funding. You are essentially borrowing your own money — the equity you have built in your home. So you won’t be required to submit a business plan to justify how the money will be used or repaid.

The home equity approach also gives you options. One is a traditional home equity loan, which functions like a typical mortgage. You’ll get a one-time lump sum that you’ll pay back, with interest, over a set period of time.

Another alternative is a home equity line of credit, which works more like a credit card. This option gives you the flexibility to withdraw funds as you need them, up to an approved amount. As you pay off the principal, your credit revolves and you can use it again.

Both home equity approaches to funding a business startup, however, include risks. These loans use a borrower’s home as collateral. So if a business struggles and the loan isn’t repaid, borrowers may lose their homes.

It’s a good idea to talk with a banker before seeking business startup funding.

Debi Enders (debi.enders@commercebank.com) is vice president, small business banking at Commerce Bank.