Should You Use a HELOC for Business?

Before using a home equity loan or HELOC, you should consider other options, like the following:

Traditional Business Loan

A traditional business loan is given by a bank or credit union and may be either secured or unsecured. Terms for business loans can last between one and 10 years. However, the term depends on the loan amount, lender and other factors.

You can get a business loan from a brick-and-mortar bank, credit union or online lender. Make sure to compare repayment terms, interest rates and fees. These loans may require some form of collateral, especially for less established businesses.

Business Credit Card

A business credit card is like a regular credit card that offers special rewards for business owners, like cash back on relevant expenses. A business card may be one of the easiest types of funding to get as a business owner, especially a new one.

Some business cards even have special 0% APR promo offers where you will not be charged interest on purchases or balance transfers, depending on the card. You will not accrue interest on your balance as long as you make your minimum payment.

Small Business Administration (SBA) Loan

A Small Business Administration (SBA) loan is a small business loan that is backed by the SBA and given by third-party lenders.

SBA loan amounts start from as little as $500 and go as high as $5.5 million. Unlike other types of business funding, many SBA loans do not require collateral. Lenders that offer SBA loans must respect the SBA maximum interest rate. These rates may be competitive with non-SBA loans.

Outside Investor Funding

Getting someone to invest in your business looks easy on “Shark Tank.” However, the reality is a little more complex. Finding outside investors can be much more complicated than simply taking out a business loan or HELOC, but it’s an option worth considering. You may have to let the investor become a part owner of the business, giving up some of your equity, but this depends on the particular terms you agree to.

Crowdfunding

Creating a crowdfunding campaign can be hit or miss. If your idea is popular, you may be able to raise a lot of money and reach your goal. However, you may miss your goal if your idea fails to interest people.

If you set up a crowdfunding campaign, you have to market it well to attract investors. Plus, most businesses provide some kind of reward for backers, like early access to a product or a special discount code later on.

Invoice Financing or Factoring

If you’re waiting a long time for invoices to be paid, you may be able to use invoice financing to help your cash flow. With invoice financing, a third-party lender will pay a portion of your invoice. When the original customer pays the invoice, the funds will go to the third-party company.

If you use invoice financing or factoring, make sure to compare the fees across various providers. In some cases, you may only receive 70% of the invoice amount. Before going this route, you can try to add more stringent payment terms or include a late fee past a certain date.

While you may still be personally responsible for guaranteeing these loans, you will not have to put your home up as collateral.