Businesses often start small, but they don’t always stay that way. As you learn to navigate your industry and market, you’ll likely form plans to expand your operations and grow your business.
However, finding the capital to fund your plans can be challenging. Many business owners apply for business loans or grants to access more funds. However, the process can be complex, and many trusted financial institutions have low loan approval rates.
One good alternative to business loans is a HELOC loan. Read below to learn more about how it works, its advantages, and potential risks.
Understanding HELOC Loans
HELOC is short for “home equity line of credit.” As the name suggests, it allows people to borrow money using the equity they have in their homes.
A home’s equity refers to the difference between the market value of your property and the amount you still owe on the mortgage.
A HELOC works like a credit card. Once approved for a specific credit limit, you can borrow from that amount for any reason with a relatively lower interest rate than other loans. As you repay the amount you borrow, the credit becomes once again available.
The interest rate for HELOC loans can change depending on the market conditions. Your home will also become the collateral for a HELOC. If you’re unable to repay your loan for any reason, you might risk the foreclosure of your property.
How It Works in Financing a Business
Finding money to start or improve your business can be a challenge. Bank loans can get competitive and require high-interest rates. Therefore, many business owners must find creative ways to fund their startups or new initiatives.
One way to fund your business is through a HELOC loan. You can take out a loan from your HELOC for virtually any reason as long as you have the equity.
If you’ve built up enough equity for your property by paying your mortgage promptly or making value-adding improvements, a HELOC is a good source of business funds.
Advantages of Using HELOC in Business
Finding ways to finance your enterprise can be tricky, and HELOC loans have emerged as an innovative way to fund further growth and opportunities. Here are some key advantages of using HELOC loans to expand your business:
Easier approval
Traditional business loans and grants often entail a lengthy and arduous process. They usually require strict criteria and extensive documentation.
HELOCs can be a suitable alternative, as the approval processes aren’t as strict as other business loans. Taking advantage of the equity in your current properties allows you to sidestep the challenges of conventional loans and gain easier access to additional capital.
Competitive interest rates
HELOC loans are an attractive alternative to traditional business loans by providing competitive interest rates. While these rates may change, you’ll likely find a HELOC loan that offers lower interest rates than traditional business loans.
This cost-effective pricing structure helps minimize the financial strain on businesses and enhances profitability by minimizing loan-related costs.
Flexible repayment
HELOC loans often have two phases—the draw and the repayment periods.
During the draw period, you can take money out of your HELOC for as much as the limit allows. You only have to pay the minimum amount or the interest rate during this phase.
After the draw period comes repayment, which usually lasts up to 20 years; you won’t be able to borrow money from your HELOC anymore during the repayment period. Instead, you’ll have to repay the amount you owe, both principal and interest.
This structured repayment system allows you to plan your loans well. It also provides enough leeway to ensure prompt payments.
Possibility for larger loans
Businesses that have scalability in mind can significantly benefit from HELOC loans. If you have established high equity in your residential properties, there is a good chance that you’ll gain access to larger credit lines.
This equity-based credit line can be the answer to finding the necessary funds to achieve business expansion.
Disadvantages of Using HELOC for Business Expansion
While HELOC loans offer attractive benefits to businesses seeking funding, they also carry risks and disadvantages. Understanding these potential outcomes can help you weigh your options and make better financial decisions.
Changing interest rates
One of the primary concerns with taking out HELOC loans is their variable interest rates. While you can access lower interest rates at certain times, these rates can change depending on market conditions.
Higher interest rates could pose significant challenges for businesses and cause financial strain. Abrupt changes in interest rates could also disrupt your financial projections, affecting overall profitability.
If you choose to fund your business expansion with a HELOC loan, it’s vital to consider this factor and develop risk mitigation strategies.
Risk of foreclosure
A HELOC loan is a secured loan, meaning you’ll need to put an asset up as collateral. In this case, your collateral will be your residential property. In the event of a default, you might lose your home.
Harness Financial Opportunities
HELOC loans present an attractive funding opportunity for businesses seeking further growth. Their accessibility and favorable terms can help entrepreneurs realize their plans for scalability and expansion.
However, like any financial decision, taking out a HELOC loan requires careful planning and consideration. Understanding the benefits and drawbacks of such a loan can help companies maximize its advantages and plan for potential risks.
