Business loans vs home equity loans: Which is better? | finder.com

Compare business loans vs. home equity loans for financing your company

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Need access to capital? Weigh these two lending tools to see how they can help your business.

If you’re weighing a business loan against a home equity loan, you’ll want to consider the pros and cons of each choice. Business loans have less risk if you default, but your business will face much higher interest rates than with a home equity loan. Determine what kind of security you want to provide and how well your business will be able to pay back a loan as you consider your options.

LoanBuilder, A PayPal Service Business Loans

Our top pick: LoanBuilder, A PayPal Service

Customizable business loans with no hidden fees.

  • Min. Amount: $5,000
  • Max. Amount: $500,000
  • One-time fixed fee charged over the life of the loan
  • Acclaimed customer service
  • Requirements: $100,000+ annual revenue, 1+ years in business, 600+ personal credit score

    How do business loans and home equity loans differ?

    A business loan is a fixed amount of capital provided by a lender in return for monthly payments with added interest. They can have either variable or fixed interest rates and may be secured or unsecured. The exact amount your business qualifies for will depend on its age, revenue and other factors. There are also a variety of business loan types, which can impact how much you’re eligible for and how your payments are calculated.

    Unlike business loans, which can take a variety of forms, a home equity loan depends on the value of your home’s equity. It uses that equity as security for the loan, which results in a lower interest rate but comes with an added risk — if you default, you may lose your home. Lenders determine your home equity by looking at the current value of your property minus the mortgage you owe on it. Your interest rate will be based on your personal credit history and other factors related to your ability to repay the loan.

    Business loanHome equity loan
    Maximum amountUp to $5 millionUp to 80% of your home value
    Interest ratesAs low as 6%As low as 4.25%
    Repayment termsDaily, weekly or monthly payments with interest over a term of 3 to 25 yearsMonthly payments with interest over terms of 5 to 20 years
    Collateral requiredDepends on the lender and your qualificationsYour home

    Compare business loans from top online lenders

    Rates last updated December 16th, 2018
    Unfortunately, none of the business loan providers currently offer loans for these criteria.
    Name Product Product Description Min Loan Amount Max. Loan Amount Requirements
    LoanBuilder, A PayPal Service Business Loans
    Customizable loans with no origination fee for business owners in a hurry.
    $5,000
    $500,000
    Annual business revenue of at least $42,000, at least 9 months in business, personal credit score of 550+.
    LendingTree Business Loans
    Multiple business financing options in one place including: small business loans, lines of credit, SBA loans, equipment financing and more.
    Varies by lender and type of financing
    Varies by lender and type of financing
    Varies by lender, but you many require good personal credit, a minimum business age and minimum annual revenue.
    Credibly Business Loans
    Funding to cover business expenses with daily or weekly repayments.
    $5,000
    $250,000
    500+ personal credit score, 6+ months in business, $15,000+ average monthly deposits
    Lendio Business Loan Marketplace
    Submit one simple application to potentially get offers from a network of over 75 legit business lenders.
    $500
    $5,000,000
    Must operate a business in the US or Canada, have a business bank account and have a personal credit score of 560+.
    National Funding Small Business Loans
    Working capital loans and equipment financing, some high-risk industries may be eligible.
    $5,000
    $500,000
    Be in business at least one year and make at least $100,000 in annual sales. Other loan types have additional requirements.
    LendingClub Business Loans
    With loan terms that vary from 1 to 5 years, enjoy fixed monthly payments and no prepayment penalties through this award-winning lender.
    $5,000
    $300,000
    12+ months in business, $50,000+ in annual sales, no bankruptcies or tax liens, at least 20% ownership of the business, fair personal credit score or better
    OnDeck Small Business Loans
    A leading online business lender offering flexible financing at competitive fixed rates.
    $5,000
    $500,000
    500+ personal credit score, 1+ years in business, $100,000+ annual revenue
    Fora Financial Business Loans
    No minimum credit score requirement and early repayment discounts for qualifying borrowers.
    $5,000
    $500,000
    Business age 6+ months. Monthly revenue $12,000+. No open bankruptcies.

    Compare up to 4 providers

    What are the benefits of business loans and home equity loans?

    Business loan

    • Competitive interest rates. Unlike business credit cards, business loans offer interest rates as low as 6%.
    • Access more capital. You could qualify for a loan of up to $5 million. Some lenders even work with the SBA to keep your rates low on larger amounts.
    • Variety of options. There are a variety of loan setups that are made to suit your business. You can choose from loans secured by your equipment to lines of credit and everything in between.

    Home equity loans

    • Predictable payments. Most home equity loans have fixed interest rates. This means you can expect to pay the same amount each month without relying on market fluctuations.
    • 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.

    What are the drawbacks of business loans and home equity loans?

    Business loan

    • Extensive application process. You’ll need to submit a comprehensive range of documents with your application, and 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.
    • Variety of terms. You may face a less competitive option like daily repayments or variable rates as well as lenders that require collateral.

    Home equity loans

    • Long repayment terms. Some home equity loans take up to 20 years to repay, which can cost you more in interest over time.
    • 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.
    • Foreclosure is a possibility. A home equity loan is a lien on your house. If you default on loan payments, your lender may sell your home to repay the debt.

    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 a fixed-term loan.

    Which borrowing option is better suited for me?

    Your decision should come down to which option provides the most benefits. A business loan may be useful if

    • You’ve been in business for several years
    • You have decent personal and business credit scores
    • You need access to a large amount of capital
    • You’d like to build your business’s credit

    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 similarly to home equity loans, except instead of putting your house up for collateral, your commercial real estate or equipment is at stake.

    However, you typically can’t get a business equity loan from your bank or mortgage lender. 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, especially if you don’t want to risk your home.

    Bottom line

    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 need capital and haven’t had luck with traditional lenders, you may want to look into a home equity loan instead. Both have their own pros and cons, so compare your business loan options and read up on home equity loans before making your final decision.

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