post by:
Carmen Marks
With the rapid growth and low startup costs of eCommerce, it seems like everyone and their brother has tried to get in on the action. But anyone with experience in the field knows that growing and scaling your business successfully entails substantial investment up front.
We’re all left asking the same question: “Which financing option is right for me?” You might be wondering whether a home equity loan could be the answer. Let’s take a look at the advantages and disadvantages of this funding option and find out why taking out a home equity loan may (or may not) be right for you.
What is a Home Equity Loan?
A home equity loan is one of several financing options which allows you to use the equity of your home as collateral. The higher your home’s value, the greater the amount you can borrow.
The full amount is paid out in a lump sum as soon as the loan closes. That means a big stack of cash up front. But from the get-go, you will have to start making fixed monthly payments on the loan, with interest.
Taking Out a Home Equity Loan
The first step is to have your home appraised by your lending institution. You will also need to have a high credit score to prove you can keep up with your monthly payments.
You don’t want to overpay on interest, so it is important to consider your budget carefully and not borrow more than you need.
Finally, you will need to define the term (duration) of the loan. A shorter term means your debt will be paid sooner. However, a longer term may be the safer option thanks to the lower monthly payments.
Why Use a Home Equity Loan for eCommerce Funding?
Home equity loans are a popular choice for small business owners whose most valuable asset is their home. It’s easy to see why this loan is a tempting option.
First of all, it is relatively simple to secure. As long as your home’s value is greater than your existing mortgage, you are likely eligible.
It can be a good choice for anyone with a well-defined budget and a steady income. If you need a large amount of money to invest immediately and have a solid estimation of your total expenses, a home equity loan could be a great way to get the money you need in short order while locking in a lower interest rate than many others.
Advantages of Home Equity Loans
For homeowners with good credit, a home equity loan is one of the quickest and easiest ways to secure eCommerce funding. By using your home as collateral, you increase your chances of approval, securing more funding to expand your business right away.
Second, it is worth noting that there are no restrictions whatsoever on how you choose to use your loan. You can spend the money whenever, wherever, and however you choose.
Additionally, the interest rates on home equity loans tend to be lower than those for traditional business loans. The lower interest rate can lead to major savings over the life of your loan.
And finally, we can’t talk about the advantages of these loans without mentioning their size. With a home equity loan, you could be allowed to borrow up to 85% of the equity you have in your home. This could be as much as $200,000 for some.
We know just how tempting it is. A sizable, easy-to-acquire, lump-sum loan with low interest and no restrictions on how you spend it – what could go wrong? Well, a few things, actually…
Drawbacks of Home Equity Loans
When we look at loans, we tend to focus on interest rates. However, there are many other fees involved. These include the home appraisal fee, closing costs, and many more. Needless to say, these expenses add up and may reduce the final amount of your loan.
A home equity loan also offers less flexibility than some others. Its structure requires you to pay interest on the full amount of your loan, even if you want to use the money incrementally.
While it is widely believed that home equity loan interest is tax deductible, this is generally not the case. Unfortunately, the tax deduction is reserved only for those who use the equity to buy, build, or improve a home. Sorry, business owners.
On top of all that, it’s possible that you may not get as much money as you hoped. Even if your property is high in value, any debt you have against it (read: your mortgage balance) will be subtracted from its value when determining how much you are eligible to borrow.
We know this, but it bears repeating: a home equity loan is a major debt, and one which must be repaid on a strict schedule. If you are not confident in the reliability of your monthly income, you should probably seek funding elsewhere.
If you already have a mortgage when you take out your loan, that means you will now have two separate mortgage payments to make each month, and any failure to make on-time monthly payments can seriously damage your personal credit score.
It might go without saying that tying up your most valuable personal asset with your business can result in complications for both your family and your finances. For example, if you should for any reason decide to sell your home before you have paid back the loan in full, the remaining balance of the loan will be due.
And of course, the most potentially disastrous disadvantage of using a home equity loan is that you are potentially putting your home at risk of foreclosure if you default on the loan. We know, no one plans on their business failing. However, losing your home is a very real risk that comes along with any home equity loan and should be considered carefully before you sign on the dotted line.
Conclusion
A home equity loan can be a viable source of eCommerce funding. It is easier to qualify for than many other options, and depending on the equity you have in your property, you could walk away with a large sum of money in a matter of weeks.
However, it is not a financing strategy for the faint of heart. A home equity loan comes with major risks. If you are considering a home equity loan to fund your eCommerce business, we encourage you to carefully consider the benefits as well as the pitfalls. Do your research, weigh your options, and discuss your decision with people you trust – particularly with any of them who may live under your roof.