Using Your Home to Secure a Small Business Loan

A Home Business Article Contributed by Sharon Hill

Your Home - a Small Business Loan Resource

If you're a sole proprietor, especially if your business is new, your best means of securing a loan for your small business is the equity in your home. There are myriad number of folks and firms out there just waiting to offer you money with your home as collateral. Your biggest headache will not be finding someone to say yes, but deciding from all the offers which is the one you should accept. Of course, rate will be the strongest determinant.

Two attractive factors in a small business home equity loan is that the repayment requirement is generally comfortable. Quite often you will only have to make a monthly payment equaling 1 percent of the total amount borrowed at that point. Small business home equity loans only charge interest on the amount of the line of credit that you borrowed. Suppose, for example, you secured a home equity line of credit of $20, 000.

Six months later you find, for the first time, that you need to borrow against that to purchase a new $1500 computer system. Your first monthly payment would charge you interest of $15, one percent of what you borrowed, rather than one percent of the total $20, 000 line of credit.

Your first stop should be at your current bank or credit union. That is usually the institution most likely to say yes, and the one most likely to offer the best rate and terms. Then you'll want to branch out to other local banks and lending institutions. Finally you can search beyond your local area. Mortgage companies are good resources - as are real estate mortgage brokers, especially one with whom you do business. Perhaps your own broker. Ask friends and family for recommendations.

Determining the Best Small Business Loan Buy

You will, of course, want to compare rates. But terms are important as well. You'll want to ask the financial institution what their small business loan draw period is. Draw period has two facets - the extent of time you are allowed to write a check for funds drawn against your home's equity, as well as the time period beyond that that you have to repay the loan. A typical small business loan draw period is 10 years to borrow from the equity and 5 more years to repay - for a total of fifteen years.

The third factor is the time it takes one institution or another to make the decision on whether to lend you money and the time it takes to get that loan program in place. If you are in a time crunch it is generally best to go with a local bank or financial institution. Their turnaround time is usually shorter.

A Word of Caution about Home Equity for a Small Business Loan

While it is always advisable to secure your home equity loan ahead of the time you may find yourself in need of a loan, you will want to remember, before you actually borrow some of that money, that you are putting your home ownership at risk. If you are less than confident that you are going to be able to find the funds to repay the loan on a timely basis, you may find your best decision is to forego the expansion or purchase until you are able to do so without borrowing against the roof over your head.