Editor's choice: First Down Funding business loans
- No prepayment penalties
- Competitive rates
- Works with bad credit and most industries
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Compare business loans vs. home equity loans for financing your company
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. 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 your ability to repay the loan as you consider your options.
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 come with either variable or fixed interest rates and may be secured or unsecured.
The exact amount your business qualifies for depends 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, a home equity loan depends on the value you’ve built in your home, or the 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 balance. Your interest rate is based on your personal credit history and other factors related to your ability to repay 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 for terms from 3 to 25 years | Monthly payments with interest for terms from 5 to 20 years |
| Collateral | Varies by loan type | Your home |
| Typical requirements |
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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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