Using a HELOC for a Personal Small Business During the pandemic
Finding sources of financing for your personal small business during the pandemic can sometimes feel impossible. Even with government programs designed to help small businesses, they may not be enough or you might want to fund large investment opportunities available now. You may need funding if, during the pandemic, your revenue streams temporarily dry up even if you have a profitable business. The problem is that this revenue did not just disappear and eventually, it will return, but many small businesses will not be able to survive until it does. Other businesses may still be profitable, but need cash to grow out and take advantage of the business opportunities that the pandemic presents. Whatever the case, finding money for a personal small business during the pandemic is one of the hardest things to do. You do not have the resources or the reputation to receive a traditional bank loan even though you know you could earn large profits either now or in the future if you just had more money.
What is a HELOC?
A Home Equity Line of Credit (HELOC) is an easy way to receive the injection of cash that you need. By using the equity you have invested in your home obtained either through amortization payments or by ownership, you can request a line of credit using your home equity as collateral. This method is like taking out a second mortgage on your home. Your house is probably one of your largest assets, but it’s illiquidity means you do not have access to what is essentially a large savings account.
How does a HELOC work?
When borrowing from a HELOC, you should ensure that you have enough cash to make the scheduled monthly payments. There are two phases of payments, so you should use a HELOC payment calculator to find out how much you will have to pay in both. During the first phase, the draw period, you will only have to pay the interest on your loan, so you can use the loan amount to finance and grow your small business. During the second phase, the repayment period, your monthly payment will increase because you have to start paying off the principal loan amount. Make sure that the draw period is long enough to give your business enough time to use the investment and make a profit. At this point, the investment in your business should have paid off making you more profitable. You can then use your profits to pay back the loan and reclaim security over your home’s equity.
Is a HELOC the right choice for me?
Before you use your home equity as collateral for some quick funding, consider all the options available to you. A HELOC is just one of the many financial resources available to small businesses. It is also not a risk-free cash injection because you are promising to pay it off with your home as collateral. Should you fail to fulfill your obligation to repay it, your house could be foreclosed. In most cases, keeping your house is a larger priority than keeping your business alive. Several resources are catered towards specific situations and as a small business, you may be eligible for relief from the pandemic. A HELOC is best when you do not have other easily accessed funding, but are confident in your business’ future ability to turn a profit. You should also consider your current debt obligations and understand how a HELOC would add to your monthly expenses.
HELOC vs Small Business Loans
The two financing methods are similar in many ways. Like a HELOC, a small business loan is a temporary financing method that needs to be paid back with interest, which is backed by collateral. As the guarantor of either loan, your credit score will be affected if you fail to make the required payments. It is also a financing option available to small businesses that may have trouble qualifying for a traditional bank loan. However, instead of using your house as collateral, a small business loan uses the assets of your business. Essentially, your business is the entity that receives the loan while a HELOC is a personal loan. This is considerably less risky to you because your home is not at risk. Instead, only the business assets and potential personal assets that you use as collateral are put at risk. If possible, you should use a small business loan to finance your business, but for many personal small businesses, they do not have enough assets to back the cash injection you need. A HELOC allows you to use your largest personal asset, your home, to temporarily prop up your business and is available even if your business has not grown to a significant size.