The key to your new business venture could be your existing home equity! If you were born with an entrepreneurial spirit but lack the start-up funds, there are a few options to turn your business ideas into reality.
One viable option worth exploring is leveraging your home equity to kick-start your business.
What is home equity?
Equity represents the portion of your home that you truly own. Calculate it by subtracting your outstanding mortgage balance from the current market value of your property.
As you pay down your mortgage and the value of your property appreciates, your equity will grow. This could provide a decent nest egg to fund your new business venture.
However, you cannot access your entire equity at once. Instead, your usable equity amount is 80% of your property’s value minus your outstanding mortgage.
For example, if your home’s value is $800,000 and you currently owe $350,000 on the mortgage, your usable equity is $290,000.
Accessing your home equity
There are a few ways to access your home equity to finance your business ideas. One common approach is to secure a home equity loan.
This involves borrowing a lump sum amount using your home equity as collateral. It can provide you with the upfront capital needed to invest in launching or expanding your business.
Alternatively, an equity line of credit can offer flexible borrowing solutions. This strategy allows you to draw funds from your equity as needed, within a predetermined credit limit.
Similar to a credit card, you only incur interest on the amount borrowed, providing greater flexibility to help manage your business finances.
Navigating the application process
Applying for a home equity loan to fund your business is similar to applying for a traditional mortgage.
You will need to submit a detailed application to a lender, which covers your financial situation and the purpose of the loan. The lender will assess your income, expenses, and property value to determine your eligibility and loan amount.
Some lenders may also require a property valuation to evaluate the market value of your home. The application process may take some time compared to other business financing options, but the benefit of accessing your home equity can often outweigh any initial effort required.
Risks and considerations
Leveraging your home equity can provide a significant source of funding, but the implications of it should not be overlooked.
Increasing your mortgage debt through a home equity loan or HELOC means assuming additional financial obligations, such as interest payments.
Carefully consider the long-term implications of borrowing against your home equity, paying particular attention to repayment schedules and interest costs.
At NMC Finance, we can help you make an informed decision about using your home equity in a way that is tailored to your business goals and financial circumstances.
Alternative financing options
If home equity funding is not suitable for your circumstances, there are several alternative avenues for business funding. Traditional business loans, personal loans, and government grant schemes all offer sources of capital, each with its own set of considerations and benefits.
Explore these options and more in our previous blogs. As always, conduct thorough research, seek expert advice, and explore all available options to make informed decisions that set your business up for success.
*This blog is intended for general informational purposes only. For personalised advice tailored to your unique financial situation, please contact NMC Finance.
