Home Equity Opportunities

Small Business Loan vs. Home Equity Loan: What’s Best for Your Business?

Greg Schultz

February 19, 2019

Small business owners are no strangers to the financial insecurities that often accompany starting your own venture. When you’re looking to accelerate the growth of your small business that usually means you’re also looking for the cash to help you do so. Beyond soliciting friends, family, and others in your network for financial help, you have several options for generating funds.

Small Business Administration (SBA) loans are one way to access funds if you’re having trouble securing a conventional business loan. However, the process can be lengthy and lenders often require you to provide an asset to serve as a guarantee. If you own a home, you have the option of taking out a home equity loan. This allows you to borrow against the equity you’ve accrued in your home, using your home as collateral.

Before you take out either a SBA or home equity loan, weigh the risks and rewards—and consider the alternatives.

Option 1: Home Equity Loan

Unlike small business loans, home equity loans put fewer restrictions on what you can do with the money from the loan. Instead, you can use the funds how you wish. Home equity loans also often come with lower interest rates and lower monthly payments than a small business loan.

The application process for a home equity loan is faster and simpler than a small business loan, too. Assuming you meet your lender’s application requirements, you should expect the entire process to take about 30 to 45 days.

In fact, the most tedious part of applying for a home equity loan is gathering the necessary paperwork. At a minimum, you’ll need the following information and completed documents handy:

  • Internal Revenue Service (IRS) Form 4506-T
  • Copy of driver’s license or other government-issued photo ID
  • Estimated home value and mortgage balance
  • Two most recent federal tax returns, including all schedules
  • Proof of homeowners insurance
  • Proof of income, such as W-2 forms, investment statements, Social Security Award letter, etc. (requirements vary depending on your employment status)

Of course, home equity loans come with a major risk: Failure to make your home equity loan payments gives your lender the right to foreclose your home. As the team at LendEDU points out, “If you are unable to make the payments on your home equity loan, it is probably because your business is in trouble. So, now you would be at risk to lose both your business and home.”

Option 2: Small Business Administration Loan

Patience is the key to SBA loans as the process takes anywhere from 60 to 90 days and potentially longer depending on the amount of the loan. Putting together your application, as Fundera explains, is often the most time-consuming.

In addition to filling out an application for a SBA loan, the Houston Chronicle says you’ll need to write a full business plan, produce financial statements showing adequate estimated cash flow, undergo a credit check, and gather documents, such as business licenses and a personal background statement, among other paperwork.

Unlike home equity loans that focus on numbers, small business loans take into account more subjective factors like your character and management abilities.

Option 3: Home Equity Sharing

Home equity loans and small business loans both take into consideration your credit score. Additionally, home equity loans often take into account your debt-to-income ratio. Both types of loans may have varying interest rates, meaning you’re subject to varying interest rate hikes throughout the life of your loan—which means higher monthly payments.

If you have equity in your home and don’t like the idea of taking on additional debt or unpredictable interest rates, a Hometap Investment may be your best bet. Hometap offers near-immediate access to your funds in exchange for a share of the future value of your home—without any interest or monthly payments.

Before you opt for home equity sharing, a home equity loan, or SBA loan, consider your specific financial situation. Even if you need funds fast, you’ll want to spend the extra time upfront to make the right choice for you and your business. After all, when your home is involved, your decision affects not only your professional life but your personal life, too.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

Greg Schultz

is a

Senior Data Scientist

at Hometap.