A business home equity line of credit (HELOC) is a revolving line of credit in your business’s name secured by the equity in your personal home. It allows business owners to borrow against the equity they have built up in their property to fund business expenses.
This product can be a helpful funding source for business owners, especially those who are just starting out and may not have large company assets.
However, any time you borrow money, it’s important to make sure you understand what a business HELOC is, how it works, how it’s different from other business loans and what sort of businesses may be eligible to get one.
How does a business HELOC work?
The funds from a business HELOC are in your business’s name, which creates separation from your personal finances. HELOCs can have lower interest rates than those for other business lending sources.
Keep in mind your personal residence is securing the line of credit. So, even if the business HELOC is not in your name, any issues with repayment can affect your personal life.
What are the stages of a business HELOC?
Getting a business HELOC can be a simple process. Here are the steps someone would take for this at Elevations Credit Union:
- Application: You would apply for a HELOC through a lender, providing necessary documentation about your home and ability to repay.
- Approval: Once approved, you would receive a line of credit based on the equity in your home.
- Draw period: During the draw period (usually 5-10 years), you would be able to borrow funds as needed up to the credit limit. Some institutions may offer interest-only payment options during this time, though this would not decrease the loan balance.
- Repayment: After the draw period, you would enter the repayment phase, where you pay back the borrowed amount. If you only made interest-only payments during the draw period, your minimum payments will increase.
Business loan vs. business home equity loan
There are many ways to secure funds for your business. Here’s how a typical business loan varies from a business HELOC:
- Collateral: Business loans may require business assets as collateral, while home equity loans use your home as collateral.
- Interest rates: Home equity loans often have lower interest rates compared to business loans.
Benefits of a business HELOC for funding your business
There are many reasons to consider getting a business HELOC if you intend to fund your business with the loan proceeds:
- Clarity and organization: A business HELOC helps maintain clear and organized financial records. This makes it easier to track business expenses, income and profitability without the confusion of personal transactions.
- Tax compliance: Separating business lending from your personal accounts with a business HELOC can simplify tax preparation and help you comply with tax laws. This can help you accurately report business income and expenses.
- Professionalism: A business HELOC presents a more professional image to clients, investors, and lenders. It shows that the business is well-managed and serious about its operations.
- Financial analysis: A business HELOC can allow for better financial analysis and decision-making. Business owners may be more able to easily assess the financial health of their business with a business HELOC vs a typical HELOC. This can help them make informed decisions based on accurate data.
- Audit preparedness: In case of an audit, having a business HELOC vs using a personal HELOC for your company can make it easier to provide the necessary documentation and support for business transactions
- Interest payment deductions: You may also be able to deduct business HELOC interest payments as business expenses, but you’ll want to consult with your tax advisor to confirm.
Can a business with an LLC get a HELOC?
Yes, an LLC can theoretically get a HELOC. As with other HELOCs for business, they typically require the business owner to use their personal residence as collateral. The process involves submitting an application in the LLC’s name. Note that the owner would be considered a guarantor.
Many types of business structures can get a business HELOC but it’s important to think about the relationship between the business owners and the owners of the personal property being used as collateral. If the business owners include individuals who are not owners of the property, it’s probably worth talking to a business banker to see what the best option available to you is.
Do business HELOCs benefit self-employed professionals?
Self-employed individuals can use a business HELOC to manage cash flow, invest in business growth, or cover unexpected expenses.
Using HELOCs for business growth
Business HELOCs can help leverage personal home equity for business purposes.
By understanding the nuances of a business HELOC, business owners can make informed decisions about leveraging their home equity to support and grow their businesses.
The Elevations Business HELOC includes:
- Long-term liquidity: 10-year draw period followed by a 10-year repayment period
- Low-cost origination: $250 credit toward your closing costs
- Affordable payments: Interest-only payments during the draw period
- Fast processing: Local, in-house underwriting and processing for fast turnaround times
Learn more about how Elevations can help your business with a business HELOC, business banking products and more.
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