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Home Business Financing: Small Business Loan vs. Home Equity Loan


A small business loan and a home equity loan are two ways to finance your home business. While both can offer good terms and can be beneficial in different circumstances, you should thoroughly investigate your options before committing to any loan. By practicing the necessary due diligence and spending some time researching both kinds of loans, you are sure to find an attractive funding source for your home business.

Small Business Loan Basics

Small business loans are approached in the same way as a typical business loan, just on a smaller scale. Generally a business plan will need to be presented to a loan officer with the loan recipient laying out a clear and concise business contingency plan. The basic requirements for attaining a small business loan include your personal credit history, a business plan, experience, education and the overall feasibility of the business you plan to start or expand. Getting a business loan is usually faster than searching for investors, and it allows you to remain in control of your company instead of answering to a board of investors.

Probably the most challenging part of obtaining a small business loan is preparing your business plan. Within your business plan, you must prove to your lender that giving you a loan is a low-risk situation. Questions that your plan should answer are how much money do you want, what will you do with the money, when will you repay the loan and what will you do if you don't get the loan. You want to portray a confidence that you will keep your business and planning moving, even if do not get the loan in question.

A nice benefit of this kind of debt financing is that as you pay down your loan, you build credit worthiness, making you more attractive to other lenders in the future when you choose to refinance your loan or expand your business.

Home Equity Loan Basics

If you own a home and are having trouble getting a traditional loan, a home equity loan may be a good way to tap into some additional funds for the startup of your business. If done properly and responsibly, this can be a good solution for a home business owner. A home equity loan uses the equity in your home as collateral to secure a loan. Because this is generally a low risk loan, typically interest rates can be quite low, and you may experience a quicker turnaround time than more traditional business financing.

Due to fluctuations in the housing market and strict debt-to-income ratios that most lenders adhere to, you most likely will only be able to take out a fraction of the equity that you have accumulated on your home. However, depending on your start up cost needs, this can still be a substantial amount of money. 

Closely consider your situation and decide which type of loan would work best for you. Talk to talk to loan officers about both options and compare interest rates, terms of the loans and overall loan amount to make a final decision and get started on the business of your dreams.

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