How To Get a Home Equity Loan to Finance Your Business

As a business owner, it’s possible to use a home equity loan (HELOAN) for business purposes. Although you’ll need to own a home with sufficient equity, it may be more suitable compared to a traditional business loan because its qualification requirements can be easier to satisfy. You can get a home equity business loan by following the process we’ve outlined below, which starts with confirming your need for funding and ends with closing the loan and verifying the receipt of funds.

If you’re unsure if it’s a better option than a traditional business loan, you can consider working with a business loan broker like Lendio. In addition to having a wide range of loans, it assigns a dedicated funding specialist for each loan applicant, allowing borrowers to get expert guidance throughout the loan process.

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Step 1: Confirm Your Need for Funding

To get a loan, you’ll usually have to pay certain fees and closing costs. There are also certain risks involved, as defaulting on the loan could damage your credit and result in the loss of business or personal assets. To ensure it’s worth these risks, we recommend considering the reasons why you’re seeking additional funding, as well as what you expect to get out of it:

  • Return on investment (ROI): Since you’ll have to pay interest fees, closing costs, and potentially other fees in getting a loan, it’s important to think about what you expect to gain from these funds. Typically, loans are best utilized when the expected gains exceed the fees associated with borrowing the funds.
  • Amount of funding needed: It’s important to have a good idea of how much you’ll need to borrow. You don’t want to run out of funds because you applied for too small of a loan amount. Similarly, applying for too much could cause you to pay more fees, let you get less favorable rates and loan terms, or result in a loan denial.
  • Alternate sources of funding: Before getting a new loan, consider the availability of other sources of funding. For example, if you don’t need a large amount of funds, it may be more cost-effective to utilize your financial reserves instead.
  • When you need the funds: It’s important to differentiate the timeline between when you want the funds and when you need to have additional funding. If you’re not in a rush to get a loan, you’ll have more time to shop rates and get a better deal on financing.

Step 2: Consider Whether a Home Equity Business Loan Is Right for You

A HELOAN is typically best for borrowers who have sufficient equity in their home and otherwise cannot qualify for a business loan. Funds can usually be used for any purpose, with few lenders imposing restrictions on what you can do with the money. Some examples of allowable uses for a HELOAN can include the following:

  • Expanding your company’s physical footprint: This can involve covering the security deposit associated with acquiring a new office space with a lease or used as the down payment on the purchase of additional real estate.
  • Covering working capital needs and other expenses: This can include short-term, daily, and recurring expenses, such as payroll, rent, utilities, and inventory costs.
  • Obtaining business-related equipment: Equipment that has a business function can be obtained with funds from a HELOAN. Common examples of business equipment include vehicles, machinery, furniture, and computers.
  • Conducting repairs or improvements: Since funds from a HELOAN can be used for virtually any purpose, you can use the money to pay for repairs, improvements, or upgrades. This can cover things like office space, real estate, and vehicles.
  • Acquiring another business: Buying another business can be funded with proceeds from a HELOAN. This can include the initial purchase price, as well as supplementing the new company’s cash flow for a short period following the acquisition. For more details, see our guide on how to get a loan to buy a business.
  • Paying for startup expenses: Without a track record of strong business credit and finances, getting a business loan as a new company can be difficult. HELOANs, however, made our list of the best ways to fund a startup because approvals are issued based on your personal credit, finances, and the equity you’ve built in your home.

One variation of a HELOAN you’ll come across is a HELOC. With a HELOAN, loan proceeds are issued in one lump sum. Meanwhile, a HELOC gives you the flexibility to draw funds continuously on an as-needed basis up to your assigned credit limit.

While a HELOC has more flexibility, interest rates tend to be higher compared to a HELOAN. Rates are also typically variable instead of fixed, so your monthly payments could fluctuate over time.

If you believe a HELOC might be a better option, check out our guide on how to use a HELOC to fund your business.

Step 3: Determine Your Eligibility for a Home Equity Loan

Although having sufficient home equity is a critical component of qualifying for a HELOAN, other common factors include a review of your credit and finances. Specific requirements can vary among lenders, but the figures below illustrate typical requirements for many lenders.

Step 4: Find a Lender for Your Home Equity Loan

The next step in getting a home equity loan for business purposes is to find a lender, and you should shop rates to improve your chances of getting the best loan terms. Also consider different types of lenders as each can have differences in things like flexibility of qualifications, additional products offered, and hours of operation.

Common types of lenders you can get quotes from include banks, credit unions, business loan brokers, and online lenders. Each has its advantages and disadvantages, summarized below:

  • Banks: Banks can offer a wide range of loan programs at competitive rates. The downside, however, is that banks typically have strict qualification requirements with little flexibility to issue policy exceptions.
  • Credit unions: Credit unions are not-for-profit organizations, and because of this, they can can offer more competitive rates and terms than banks. However, compared to banks, they may not offer as many loan programs or lending services.
  • Business loan brokers: Brokers partner with several different lenders, and you’ll typically be paired with a dedicated loan specialist whose job is to match you with the lender and loan best suited for your needs. While brokers often deliver a high level of service and can offer many types of loans, it can come at the cost of higher rates and fees.
  • Online lenders: Lenders that operate primarily online can offer some of the best rates possible as they have fewer overhead costs for things like office buildings and real estate. Customer service and hours of operation, however, can be lacking when compared to the other types of lenders we’ve mentioned.

To get the best rate possible, we recommend getting quotes from multiple lenders. Although rare, some lenders can provide you with a rate or fee quote without a formal loan application or the requirement to conduct a hard pull of your credit report. For the majority of other lenders, however, you’ll need to provide permission for them to conduct a hard pull of your credit and agree to complete a formal loan application.

We recommend shopping rates within a 30-day period. This is because according to Experian, most credit scoring systems—such as FICO—recognize that it’s normal for borrowers to get multiple quotes for a large loan, such as a home or car. As a result, multiple credit inquiries in a 30-day period related to a mortgage will be treated as a single credit inquiry for credit scoring purposes.

In addition to the costs associated with getting a loan, you should consider how the lender conducts business and what else it can offer. This can impact your experience in getting the loan and the type of service you can expect once the loan has been funded.

Some examples can include:

  • Other loan products or banking services offered
  • Hours of operation
  • Number and location of offices
  • Expertise in your company’s line of business
  • Customer reviews and ratings

Step 5: Apply and Submit Required Documents

If you haven’t already submitted a formal loan application to get a rate quote, you’ll need to do this once you’ve decided on a lender. Once you’ve applied and the lender has reviewed your application, it will request credit and financial documents. Lenders will review these items to verify your eligibility and ability to repay the loan.

Required documents vary from lender to lender but commonly include items, such as tax returns, letters of explanation, and business bank statements. Having these items prepared prior to applying for a loan can help expedite your loan application and get you funded more quickly.

Step 6: Schedule Third-party Inspections

Lenders issuing HELOANs typically require an appraisal inspection of your property to verify its value and condition. If a physical inspection of your home is needed, your lender should notify you of the appraisal company being used. The appraisal company should then contact you to schedule an appointment.

Items found during an appraisal inspection that will commonly disqualify you from getting a HELOAN include the presence of any health or safety hazards, unpermitted additions, nonfunctional areas of the property, and incomplete repairs or renovations.

While an appraisal inspection is the most common type of third-party inspection required, you may also be asked to get others depending on the details of your application. Some examples may include septic or well inspections, home inspections, pest inspections, radon testing, mold inspections, and foundation inspections.

Step 7: Review the Lender’s Decision for Next Steps

Once the lender has received all documents from you and any third-party companies, it can complete a full review and issue a loan decision. In most cases, you’ll receive one of the following:

  • Full loan approval with no conditions: This is the most ideal outcome for a loan, as it means the lender has issued an approval without requiring any additional documents.
  • Conditional loan approval: This is a common outcome and is an indicator that your lender believes it can issue an approval, but just needs some additional documentation for verification. This can usually involve providing the lender with an updated copy of financial statements or explanations to clarify minor discrepancies.
  • Suspended loan: If a loan is suspended, it is neither approved nor denied. This often occurs if the lender doesn’t have enough information to make a determination one way or another and needs you to provide clarification. Some examples can include an incomplete loan application, documents that indicate a different source of income, or other major discrepancies.
  • Counter-offered loan: Although not the most ideal, a counter-offer can be made if the lender can issue a loan approval, but just not based on the terms you requested. Common counteroffers include a different interest rate, loan amount, or repayment term.
  • Loan denial: If a lender does not believe it can issue any financing at all, it will typically contact you first to discuss the reasons why. This conversation is usually made to verify nothing has been overlooked that might otherwise help you get qualified for financing.

Step 8: Review Terms of Your Loan Approval

Once you’ve reviewed the lender’s decision, you can choose whether to accept or reject the terms. If the terms are agreeable, you may need to sign preliminary disclosures to indicate your acceptance of the loan offer. These disclosures will contain detailed information about your loan, such as its interest rate, repayment term, and fees.

Step 9: Schedule a Signing Appointment With a Notary Public

Once you’ve accepted the terms of your loan, the lender will assign a notary public to your file. This individual will contact you to schedule a signing appointment for the final loan documentation. To make this process convenient, it’s common for notaries to be able to meet with borrowers at their homes or places of employment.

Since the function of a notary public is to verify the identity of the individuals signing a document, pay special attention to the instructions they give you with regard to the type of identification that will be considered acceptable. Expired forms of identification might not work, and you may be required to produce multiple forms of identification.

Since you’ll be signing the final paperwork for the loan, you should carefully review the documents to ensure the terms of the loan match the terms of approval you were given previously. At a minimum, you should double-check the following:

  • Interest rate
  • When the rate may change (if applicable)
  • Loan amount
  • Loan repayment term
  • Monthly payment amount
  • Loan fees, such as prepayment penalties or late fees
  • First payment due date
  • Time and location of required minimum payments

Step 10: Close the Loan and Verify Receipt of Funds

Upon completion of the signing appointment with the notary public, the lender will conduct one final review of the signed paperwork. This is done primarily to ensure that everything was signed correctly and that there are no missing signatures or dates. Once verified, your lender will disburse funds and your loan will be considered complete.

Pros & Cons of a Home Equity Business Loan

Alternatives to Home Equity Loans for Financing Your Business

If you’re unsure if a home equity business loan is the best option for funding your company, you can consider the following alternatives:

  • Rollover for business startups (ROBS): A ROBS provides tax- and penalty-free access to your retirement savings. You’ll typically need a balance of at least $50,000, but you can save on interest fees since it’s not a loan that needs to be repaid. Check out our ROBS guide to learn more about how it works and our picks for the best ROBS providers that can help you through the process.
  • Business credit card: This can be useful for smaller, recurring expenses. It can also be easier to get, with many issuers placing a larger emphasis on your personal credit to determine your eligibility. See our roundup of the best small business credit cards for our recommendation.
  • Personal loan: Most personal loans can issue up to $100,000 in funding and also look at your personal credit, making them a good option for companies with bad business credit. See our picks for the best personal loans for business funding.
The steps involved in getting loans can vary, so we recommend checking out our guide on how to get a small business loan. It offers tips on how you can get through the approval process more quickly.

Frequently Asked Questions (FAQs)

Yes. Getting a home equity loan can be difficult because there are many different factors that can result in a loan denial. In addition to strict qualification for credit and income, you must have sufficient equity in your home and the property must be free of health and safety hazards.

It can take anywhere from 30 to 60 days to get a home equity loan. This is largely dependent on how responsive you are to the lender’s requests for information, the complexity of your loan application, and the volume of applications the lender has received from other borrowers.

A home equity loan is a type of personal loan secured by your home, and few lenders place restrictions on how the funds may be used. A business loan can be secured or unsecured, with many lenders requiring funds to be used for business purposes only.

Bottom Line

A home equity loan can be a viable alternative to funding your business. This is especially true if you have bad business credit or otherwise cannot meet the qualifications for a traditional business loan. To get a HELOAN, you’ll need to have strong personal credit and sufficient equity in your home. Before getting a HELOAN, however, you should shop rates with multiple lenders and consider other funding options that could potentially be a better fit for your needs.

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