Editor's choice: First Down Funding business loans
- No prepayment penalties
- Competitive rates
- Works with bad credit and most industries
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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.
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|
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.
Your decision should come down to which option provides the most benefits.
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.
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.
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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