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

Need access to capital? Weigh these 2 lending tools to see how they can help your business.

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By

Leanne Escobal

&

Stacie Hurst

Updated

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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 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.

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 amountUsually starting between $5,000 and $10,000 and reaching up to millions of dollars depending on what you need the funds for. CSBFP loans amounts can go as high as $1,000,000.Up to 80% of your home’s value (or up to 65% if you’re getting a home equity line of credit (HELOC) instead)
Interest ratesVaries widely between lenders but can start at 4-5%.As low as 3.75-4%
Repayment termsBiweekly or monthly payments of the principle amount plus interest over a term ranging from 2-3 years (for equipment) to 25 years (for real estate). Short-term loans for working capital can have terms ranging from several months to 2 years.Lenders may offer weekly, biweekly, monthly or semi-monthly payments with interest over terms of 1 to 25 years.
Collateral requiredDepends on the lender and your qualifications. If your business is already running profitably and your personal or business credit history is strong, minimum collateral may be required.

Collateral can include: business equipment, real property, guarantees on future payments or even guarantees on your own personal assets. Permanent life insurance policies might also be acceptable as collateral.

Your home

Compare business loans and home equity loans from online lenders

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Name Product Interest Rate Loan Amount Loan Term Minimum Revenue Minimum Time in Business Loans Offered
OnDeck Business Loan
OnDeck Business Loan
8.00% – 29.00%
$5,000 - $300,000
6 - 18 months
$100,000/year
6+ months
Secured Term, Line of Credit, Merchant Cash Advance
To be eligible, you must have been in business for at least 6 months with a minimum annual gross revenue of $100,000.

OnDeck offers fast and simple financing. Apply in less than 10 minutes with your basic business information and see your loan offers without hurting your credit score. Get approved within 1 business day, and choose your term, amount and payback schedule once approved.
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More Info
Merchant Growth Business Loan
Merchant Growth Business Loan
12.99% - 39.99%
$5,000 - $500,000
3 - 12 months
$10,000 /month
6 months
Unsecured Term, Line of Credit, Merchant Cash Advance
To be eligible, you must have been in business for at least 6 months and have a minimum of $10,000 in monthly sales.

Merchant Growth offers financing tailored to business needs. It specializes in providing capital based on future cash flows, but it also offers fixed solutions. Fill out an application within 5 minutes and get your funds within 24 hours.
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More Info
Loans Canada Business Loan
Loans Canada Business Loan
6.60% - 29.00%
$4,000 - $500,000
3 - 60 months
over $10,000/month
100 days
Unsecured Term
To be eligible, you must have been in business for at least 100 days, have a Canadian business bank account and show a minimum of $10,000 in monthly deposits ($120,000/year).

Loans Canada connects Canadian small business owners to lenders offering financing up to $500,000. Complete one simple online application and get matched with your loan options.
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More Info
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Name Product Interest Rate Loan Amount Loan Term Requirements
Fairstone Secured Personal Loan
Fairstone Secured Personal Loan
19.99% - 24.49%
$5,000 - $50,000
36 - 120 months
Requirements: must be a homeowner, min. credit score 560
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View details
Alpine Credits Home Equity Loan
Alpine Credits Home Equity Loan
10.00% - 22.99%
$10,000 - $500,000
Up to 60 months
Requirements: must be a homeowner, min. credit score 300
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View details
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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 4-5%.
  • Access more capital. You could qualify for a loan of millions of dollars depending on the size and scale of your business. Some lenders even work with the CSBFP 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. CSBFP loans are partially backed by the government and are therefore easier to qualify for if you have less than perfect credit or haven’t been operating for long.

Home equity loans

  • Predictable payments. Lenders may allow you to choose a fixed interest rate. 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 – where loan money has been used for business purposes – is tax-deductible. Note that interest paid on loan money that’s used for personal reasons is not 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 25 years to repay, which can cost you more as interest charges compound 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.

Compare business loans to other financing options

Merchant cash advances
Business credit cards
Private investments
Business lines of credit

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