Can You Use a HELOC or Home Equity Loan for Business?

Starting a business takes more than a brilliant idea—it takes capital. For homeowners, tapping into home equity through a loan or line of credit (HELOC) might be a way to secure funding. These options let you borrow against the value of your home, providing access to cash for business needs.

However, using home equity to fund a business carries risks. This guide explores how home equity loans and HELOCs work, their advantages and drawbacks, and how to decide whether they’re the right choice for your entrepreneurial goals.

How do home equity loans and HELOCs work for business funding?

If you’re considering a home equity loan or HELOC to fund a business, understanding how they work is crucial. Both options allow you to tap into your home’s equity for cash, but they function differently.

HELOC vs. home equity loan

HELOC	Home equity loan
Revolving line of credit	Lump sum
Draw period (typically 10 years) following by repayment period (up to 20 years)	Predictable payments over 5 to 30 years
Pay interest only on what you borrow	Pay interest on the full amount of the loan
Rates can be fixed or variable	Fixed rate

To qualify, most lenders require you to have at least 20% equity in your home, measured by your loan-to-value ratio (LTV). Lenders often set an LTV limit of 80%, calculated as:

(Outstanding mortgage balance ÷ Home’s current value) × 100

For example, if your home is worth $345,000 and you owe $270,000, your LTV is 78%, qualifying you under the typical 80% threshold.

Home equity loan for a business startup vs. an established business

A home equity loan can be a valuable funding option for both startups and traditional businesses, but the differences between the two can affect how you approach borrowing:

Home equity loan for a startup

• A startup typically has no operating history or revenue. This makes it harder to qualify for traditional business loans, which often require proof of cash flow and creditworthiness based on business performance.
• Home equity loans can offer a lifeline for startup founders who have personal assets (home equity, for example) but lack business credit or financial track records.
• However, startups are inherently riskier. They often lack the guaranteed income to support loan repayment. Evaluate whether your business plan and potential returns justify using your home equity for funding.

Home equity loan for a traditional business

• Established businesses with a proven track record might have access to more financing options, such as small business loans, equipment financing, or business credit lines. These options might better align with business-specific financial needs.
• A home equity loan could still be beneficial if your business needs a large sum for expansion, renovation, or purchasing inventory but you don’t qualify for other business loans.

In either case, it’s essential to:

• Assess your business’s financial projections and risks.
• Ensure you have a solid plan for repayment, especially if your startup doesn’t generate immediate revenue.

If your business is a startup, consider consulting with a financial advisor or business mentor before tapping into your home equity. They can help you balance the potential benefits with the risks unique to startups.

Pros and cons of a home equity loan or HELOC for business

Using a home equity loan or HELOC to fund your business can be appealing, but it’s important to weigh the benefits and risks.

Pros

• Lower interest rates

  Home equity loans and HELOCs may have lower rates than personal loans, credit cards, or business loans, which can save you money over time.

• Easier qualification

  Because these loans are secured by your home, lenders may have more lenient requirements compared to unsecured business financing. This can be helpful if your business is new or doesn’t meet revenue thresholds.

• Faster access to funds

  Compared to small business loans, home equity financing can have a faster approval process, sometimes taking less than two weeks, depending on the lender.

Cons

• Risk to your home

  Because your home is collateral, missing payments can lead to foreclosure. This is a significant risk compared to unsecured loans, which don’t put your home at stake.

• Limited borrowing power

  Your loan amount is capped at a percentage of your home’s equity, which might not be sufficient for larger business needs, such as expansion or equipment purchases.

• Upfront costs

  Closing costs and fees for home equity loans and HELOCs can add up, requiring additional funds upfront.

• Doesn’t build business credit

  Payments on a home equity loan or HELOC are tied to your personal credit, not your business credit. This won’t help you establish or improve your business credit profile.

• Requires good credit for the best rates

  Borrowers with strong credit scores receive the lowest rates, while those with poor credit might face higher interest costs.

Using your home equity to fund your business can be a viable option if you need quick, cost-effective financing. However, it’s essential to ensure you can manage the payments to avoid jeopardizing your home. Evaluate your business needs, potential returns, and financial stability before moving forward.

Alternatives to a home equity loan for business financing

If you aren’t sure you want to use home equity to fund your business, consider the following instead.

Alternative	Best for
Small business loan	Established businesses needing substantial funding with structured repayment terms
Personal loan	Business owners without significant home equity who need fast, unsecured financing.
Credit card	Smaller, short-term expenses and earning rewards on purchases

Small business loan

A small business loan is designed specifically for businesses. It provides a lump sum or line of credit based on your company’s revenue, credit, and operating history.

Pros

• Builds business credit

  Helps separate business and personal finances, improving your business credit score.

• Higher borrowing limits

  Many lenders offer larger sums than home equity loans, ideal for major business investments.

• Tailored to businesses

  Terms and features are often designed to meet business-specific needs.

Cons

• Lengthy underwriting

  Approval depends on factors that include business history, revenue, and collateral, which can take weeks.

• Business credit requirements

  Newer businesses or those with limited revenue may struggle to qualify.

See the highest-rated small business loans.

Personal loan

A personal loan is an unsecured lump-sum loan with fixed repayment terms and interest rates, often approved based on your credit and income.

Pros

• No collateral required

  Unlike home equity loans, personal loans don’t put your home at risk.

• Fast approval

  Many personal loans are disbursed within one to two business days.

• Equity not needed

  Approval depends on your credit and income, not homeownership.

Cons

• Higher interest rates

  Rates can climb into the 30% range for borrowers with lower credit scores.

• Lower borrowing limits

  Many lenders cap loans at $50,000 or less, which may not meet your business needs.

• Shorter repayment terms

  Most personal loans must be repaid within one to five years, leading to higher monthly payments.

• Stricter credit requirements

  As unsecured loans, approval relies heavily on your credit profile.

See our resources on the best personal loans and the best personal loans for business.

Credit card

A credit card provides a revolving line of credit for purchases or cash advances, often with rewards or promotional interest rates.

Pros

• Rewards programs

  Earn cash back, points, or miles on business purchases.

• Introductory 0% rate

  Pay off balances over time without interest during the promo period.

• Employee cards

  Issue cards to employees with customizable spending limits.

• Quick cash access

  Cash advances provide fast funds, though often at higher rates.

Cons

• High interest rates

  Rates tend to be higher than home equity loans, especially after promo periods end.

• Smaller borrowing limits

  Credit limits may not cover significant business expenses.

• Limited cash availability

  Cash advances are capped and typically incur additional fees.

Read More

HELOC vs. 0% Interest Credit Card

Home equity loan vs. business loan: Which is better?

Business loans are designed to help you start, grow, or acquire a business. They come in various forms, including:

• SBA loans: Government-backed loans offering favorable terms and high borrowing limits (up to $5 million).
• Business term loans: Lump-sum loans with fixed repayment schedules.
• Business lines of credit: Flexible borrowing for short-term cash flow needs.
• Equipment loans: Loans for purchasing business equipment.
• Alternative financing: Includes merchant cash advances and purchase order financing.
• Business credit cards: Useful for smaller purchases or short-term financing.

Each type of business loan has unique features, such as borrowing limits, interest rates, collateral requirements, and revenue or credit score thresholds. Home equity loans and HELOCs, by comparison, use your home’s equity as collateral, which makes their requirements different.

HELOC or home equity loan	Business loan
Limit depends on your home’s equity and your lender’s LTV limit	SBA loans can offer millions of dollars
Relies on your personal credit, income, and equity in your home	Considers your company’s financial history, revenue, and business credit
Rates tend to be lower than unsecured business loans	Rates can vary based on your credit profile and the loan type
Your home is at risk if you can’t repay	May not jeopardize your personal assets if it’s tied to your business

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Which is better?

A business loan might be the better option if:

• You need to borrow large sums of money.
• Your business is established and meets the lender’s financial requirements.

A home equity loan or HELOC may be a better choice if:

• You’re starting a new business and don’t meet business loan qualifications.
• You want lower interest rates and have significant home equity to leverage.

Can I use my home equity to buy a business?

Yes, you can use a home equity loan or HELOC to buy an established business. These options allow you to borrow against your home’s equity, giving you access to funds you can use for almost any purpose, including acquiring a business.

Buying an established business might be appealing because it’s already generating revenue and offers the potential for faster returns than starting a business from scratch.

If you’re considering this route, it’s important to account for all associated costs beyond the purchase price of the business. Common expenses include:

• Assumed leases or financial obligations: These might include equipment leases, rental agreements, or outstanding vendor payments.
• Prorated taxes: Such as property taxes that you assume as the new owner.
• Professional fees: Including attorney and accounting fees to ensure the purchase is handled legally and is financially sound.
• Prorated utility and insurance costs: These might be owed at closing for services or policies the previous owner paid in advance.
• Lien searches and recording fees: To ensure there are no outstanding claims on the business or its assets.

Once the sale is final, consider additional post-purchase costs, such as:

• Hiring and training staff: If employees leave after the sale, you may need to onboard new hires.
• Investing in new equipment or inventory: To maintain or improve operations.
• Rebranding or marketing efforts: To align the business with your vision or attract new customers.

By planning for these costs, you can better determine how much of your home equity to withdraw and whether this funding method is the right choice for your business goals.

What are the next steps if a home equity loan is your best option?

Using a home equity loan or HELOC to fund your business can be a practical choice if you’ve weighed the risks and benefits. However, it’s crucial to explore all other funding options first.

If you’re uncertain about your ability to make consistent payments, consider unsecured financing alternatives that don’t put your home at risk.

If you’re ready to proceed, here’s what to do next:

1. Estimate your borrowing potential: Use our home equity loan calculator to determine how much you might be able to borrow based on your home’s equity and your lender’s loan-to-value requirements.
2. Compare lenders: Browse our curated list of the best home equity loans to find a lender offering competitive rates and terms that align with your financial situation. If you prefer the flexibility of a line of credit, review our list of the best HELOC rates and lenders.
3. Consult a professional: Before finalizing your decision, speak with a business consultant, attorney, or certified public accountant (CPA). These experts can help you evaluate whether home equity financing aligns with your business goals, explore potential liability protections, and maximize tax benefits by identifying qualified business expense deductions.

Making an informed decision is key to ensuring that your business funding strategy supports your long-term success.