How to Use Home Equity Loans to Finance Your Business

Many small business owners who are in need of financing do not realize the tremendous resources that are available at their fingertips. Those who own a home often have another type of loan available to them, the home equity loan or line of credit.These loans eliminate some of the problems posed by collateral. If you own a home or part of a home, that ownership stake can be used as collateral instead. This has its pros and cons; it’s good because it is available to many more small business owners, but it could potentially become a problem if the borrower is unable to pay back the loan. In this case, the lending institution acquires an ownership stake in the home.Home equity loans are generally available from banks in two forms-the traditional loan format and the revolving line of credit. The traditional bank loan form involves a lump sum, with interest payments made on the entire amount. The line of credit, on the other hand, essentially functions as a credit card does-your limit is tied to your home’s equity, and you only pay interest on the outstanding principal. Interest rates on both of these types of home equity loan are generally much lower than credit card interest rates.The amount of money you can borrow with a home equity loan varies from bank-to-bank. However, most banks use a metric called the loan-to-value ratio. They measure the amount of debt you have against your home, and compare that to the value of the home. Banks feel comfortable loaning you money up to an 80% loan-to-value ratio. So, if you currently owe less than 80% of your home’s value, you can probably find a home equity loan to make up that remainder to finance your business.