You need access to cash to run and maintain your business. But for some small businesses in these economic times, banks have withdrawn or limited credit lines that businesses need to operate. Without access to credit lines, your expansion and marketing opportunities may be limited since your cash on hand may be needed to meet payroll, taxes, or other must-do expenses.
An option that may be available (until better credit times return) is the use of a secured home equity line of credit. Some small businesses use the home equity as emergency cash when funding is needed to operate the business.
WE CAUTION, HOWEVER, borrowing funds against your home should only be used sparingly and only when you need the funds to secure a future cash inflow for the business.
A home equity line of credit (HELOC) is type of revolving credit. When selecting a HELOC, your residence serves as collateral for your loan. If you have accumulated equity in your home and have a good credit rating, a HELOC can be easy to obtain. But first, you will want to get organized and create a strategy to help you secure financing through a financial institution.
Consult With Your Accountant
You may think that a particular, low-rate HELOC may be the most effective approach for you, nevertheless your accountant may not share your view. For some property owners the tax benefits of a HELOC may not be advantageous while a home equity loan (HEL) or other funding arrangement may be worthwhile over time. Talk to your financial adviser to come up with a borrowing strategy with the best tax implications.
Evaluate Your Needs
Your financial adviser will probably persuade you to borrow only what you may need. What this means is creating a spending plan outlining how much money to access. Even though a HELOC does not require you to tap all of your available funds, you may want to consider a line only large enough to pay for the money necessary.
Check Around for Lines of Credit.
Your financial institution and your mortgage broker are two resources to seek out your HELOC. You will also want to examine their particular rates and compare those with what other lenders have to offer which means broadening your search accordingly. The majority of lines of credit offer adjustable interest rates; compare those rates along with fees and closing costs to figure out the best HELOC for you. Have potential lenders explain the terms of their contracts; negotiate for a lower rate or fees wherever possible.
Apply for a HELOC.
Once you have found the HELOC you want, then apply for it. Your lender will obtain your credit information before granting approval and may ask for other documentation prior to closing.
Close on Your Credit Line.
Once you are satisfied with the terms of your line of credit, then arrange with your lender to close the deal. Consult with your financial adviser as needed.
The Truth in Lending Act (TLA) may allow you to cancel your HELOC within three business days if you change your mind. Your contract should explain the procedure for invoking a rescission.
Let us again repeat. Your HELOC should only be used for emergency business funding. Once your business operation turns around, make it a priority to pay down your HELOC will business funds. Discuss the tax and finance ramanifications with your CPA.