Why Might It Be Wise to Use My Home's Equity to Finance My Business
No matter what business you are in, there usually comes a time when you need outside cash. Whether a retailer or wholesaler who needs inventory, a manufacturer who needs accounts receivable financing, or a professional services company needed equipment, computers, or furnishings, there is often a need to use OP money.
While the chances of getting money at a reasonable rate changes with the financial season, here is a fairly exhaustive list of potential sources of borrowing for small business today. These are listed roughly in order of cost of the funds:
- Borrowing from a family member
- Supplier financing through normal or extended terms
- Home Mortgage or Home Equity Line of Credit
- Borrowing against other assets such as insurance policies
- Bank Financing (may require personal guarantee including home)
- Borrowing from friends
- Selling Stock
- Equipment Leases
- Credit Cards
- Personal Finance Companies
- Accounts Receivable Lines of Credit (May require home as collateral)
- (I've left off crowd sourcing for now as it is not borrowing)
Making the Case for SMB Financing with a Home Mortgage
Says Catherine Clifford at Entrepreneur Magazine:
The average interest rate for the benchmark 30-year fixed mortgage was 3.78 percent this week, according to the most recent national weekly mortgage survey from Bankrate.com, the online personal finance resource headquartered in North Palm Beach, Fla. That average includes 0.37 discount and origination points. With mortgage interest rates hovering below 4 percent, refinancing your home mortgage right now can lower your monthly payment and free up capital for your business.
Since the credit crunch hit several years ago, it's been largely difficult for many business owners to secure a mortgage refinancing. While interest rates remain at near-historic attractive levels, approvals haven't gotten appreciably easier.
Depending on where you live, how long you've owned the property, and whether you have been borrowing on it over the years for various reasons, you might have available equity to borrow $20,000, $100,000, or more with anywhere from 10 - 40 years to repay.
Borrowing Money on Your Home While Reducing Your Monthly Payment
What is doubly ironic when given the horrific financial times of the last 6 years, you may be able to borrow $100,000 on your $500,000 home and see your payments decline. Some, who have been stuck with mortgage interest rates of 5% or higher, can save so much on the interest charges that the loan has no effect on their payments or even sees them reduced. Of course, the interest payments are tax deductible.
What Steps Do I Take If I Want to Borrow Against My Home for Business Financing
The lender does have some interest in the use of funds. Depending on the remaining equity in the home and your proof of income, they may feel it is important to also see your business profit and loss statements, tax returns, and balance sheet. Your personal income that your derive from the business will also be scrutinized. If you take a regular payroll check and always cash it, then there will be little concern. However, if you take draws, loan your company money, don't cash checks you take, or have off books income (no help at all), you will need documentation.
Aggressive Tax Practices May Hurt Your Borrowing Chances
The IRS and your lender have competing interests. You may prefer to minimize your income as a business and personally in order to reduce or defer taxes. When you present your company and business income information, however, they want to see plenty of income to prove your ability to repay the loan. It is often recommended that you may need to change some of your tax reduction approaches for a year or two in order to shore up your income statement. This is not only true for mortgages, but for any lender or investor looking at your company.
Credit Scores and History
Some business owners have had a tough year or years where their business income impacts their personal credit history. If that is the case for you, giving yourself some time to fix your credit score may be in order. Depending on the damage, it may take three months to several years to get your credit score back to a place where mortgage lenders will be satisfied.
You will need a score of 620 to get in the door, but expect a tougher go and higher interest rates. At 680 - 700 you are in the sweet spot for an easier application process and a top interest rate. At 760 you are golden.
You can do a lot to fix your credit score. Check out this article for a DIY method
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