Need access to capital? Weigh these two lending tools to see how they can work for your business.
You’ve done the work to start your business, but now you need access to more capital to keep it growing. You have plenty of loan options to consider, but the question is: Which type of lending can best fit the financial needs of your business?
If you’re weighing a business loan against a home equity loan, read our guide to learn what separates these two financing options and which might be better for your business.
How do business loans differ from home equity loans?
A business loan is a fixed amount of capital provided by a lender in return for monthly payments with added interest. Whether unsecured or secured, business loans come with set maturity dates by which you must repay the loan.
Similar to a business loan, a home equity loan gives you access to capital. But the amount you’re approved for is ultimately based on the amount of equity you have in your home. Lenders determine your home equity by looking at the current value of your property less the mortgage you owe on it. A home equity loan uses the equity of your property as collateral to secure the loan.
|Business loan||Home equity loan|
|Maximum amount||Up to $5 million||Up to 80% of your home value|
|Interest rates||As low as 6%||As low as 4.25%|
|Repayment terms||Daily, weekly or monthly payments with interest over a term of 3-25 years||Monthly payments with interest over terms of 5–20 years|
|Collateral required||Depends on the lender and your qualifications||Your home|
Compare business loans from top online lenders
What are the benefits of business loans and home equity loans?
- Competitive interest rates. Unlike business credit cards that tend to come with higher APRs, business loans can offer interest rates as low as 6%.
- Access more capital. Depending on the lender, you could qualify for a loan of up to $5 million.
- Variety of loan options. Multiple loan types are available — installment loans, interim loans, balloon payment loans and lines of credit.
Home equity loans
- Predictable payments. With a fixed interest rate, you can expect to pay the same amount each month.
- Lower interest rates. While business loans can have competitive interest rates, home equity loans can be even lower since they’re secured by a personal asset.
- Tax-deductible interest. Interest paid on home equity loans is often tax-deductible.
- Flexible spending. Unlike business loans, you can generally use your home equity loan for any legitimate purpose.
What are the drawbacks of business loans and home equity loans?
- Extensive application process. You’ll need to submit a comprehensive range of documents with your application; once complete, your application could take several weeks to process.
- Strict requirements. Business loan lenders prefer established businesses to startups, and often require a personal credit score of at least 700 and a business credit score of 75 or higher.
- Collateral required. Secured business loans require collateral — such as business inventory or real estate — to protect the lender against default.
Home equity loans
- Long repayment terms. Some home equity loans take up to 20 years to repay, which can cost you more in the long run.
- Home value can affect equity. If your home declines in value, you could lose the available equity in your home and be forced to refinance.
- You could lose your home. If you default on loan payments, your lender may sell your home to repay the debt.
- Closing costs. Home equity loans can sometimes come with more costs than a business loan, including appraisal fees, application fees and even lawyer fees.
Loans vs. lines of credit
Does your business need a continuous source of financing to cover an ongoing project or make up for a drop in sales during an off season? You might want to take out a line of credit instead of a loan.
These give your business access to a set amount of funds that you can withdraw from and repay as you need. Think of it as a credit card but with higher limits, generally lower rates and less time to pay off your debts.
If this is something your business could benefit from, consider looking into a business line of credit or a home equity line of credit (HELOC) instead of fixed-term loans.
Which borrowing option is better suited for me?
Applying for a business loan could be a solid option if:
- You’ve been in business for several years and have decent personal and business credit scores.
- You need access to a large amount of capital.
- You’d like to build your business’ creditworthiness.
A home equity loan could be helpful if:
- You own your home and are having trouble accessing a traditional business or personal loan.
- You’d like to leverage the value of your home for a large one-time expense.
- You’re looking to start a business and need access to a fixed amount of capital.
Business equity loans: The best of both worlds
If your small business already has some valuable assets, you might want to consider taking out a business equity loan instead. These work similar to home equity loans except instead of putting your house up for collateral, your commercial real estate or equipment is at stake.
Also you typically can’t get a business equity loan from your bank or mortgage lender. Instead, you’ll have to borrow from a lender that specializes in business loans.
What's the difference between business equity financing and a business equity loan?
An equity investment is when you sell a portion of your business’s ownership — a share — to an investor in exchange for financing. A business equity loan is when you put your business’s assets up for collateral to up your chances of getting approved for a loan with low rates.
Startups and small businesses that have trouble qualifying for a business loan might want to consider business equity investments. You can read more about how business loans and equity investment stack up by checking out our comparison guide.
Operating a business and managing financial options can be challenging. To help your business thrive, understand the options available to you before settling on a decision.
Business loans and home equity loans both offer access to financing, but interest rates, terms and lenders will vary.
If you’re a well-established business seeking a competitive rate and flexible terms, a business loan could be a good fit for you. If you require access to capital and haven’t had luck with traditional lenders, you may want to look into a home equity loan instead.
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