It goes against the grain but sometimes using your home equity for your business makes sense. If you are a small business owner and you need financing to help your business grow, start a new business, your SBA loan is up for refinancing or maybe you need to buy out a partner? Most small business owners look to get a loan from the SBA or another commercial bank for this purpose but very few think to use their home equity for such a purpose. The reasoning by most is that they want to keep their home separate from their business or their spouse does not want to "risk" their home for the business.
Point of fact is that the majority of small business loans have a personal guarantee associated with them and therefore the house is still at risk. A strategy we suggest with many of our clients is to use the home equity (via a cash out refinance transaction) to satisfy the needs for the business. The main reason for doing it this way is that you can usually borrow the money out of your house for two and sometimes up to four percentage points cheaper than a traditional business loan. In a recent case study a client was buying out their business partner and needed to remove the partner from the current $400,000 business loan.
Traditional banks were offering a commercial loan around 8.75% and we were able to provide the client with a 30-year fixed rate mortgage for only 5.75%. We then instructed their CPA to draft a private note from the clients as individuals to their business in order to claim this deductable expense that the commercial loan would have provided. Now there is some leeway on how you can structure this private note but their CPA left the rate the same so it was a wash.
End result: The client was able to buy out their partner much quicker than going the traditional route and at a much lower cost than their CPA originally thought. The client was able to save $812/month or nearly $10,000 per year in cash flow resulting in close to $300,000 in savings if they carry the loan to term. While this is not always an option, you should investigate if this strategy may be right for you? Ask your mortgage planner to run a scenario and if it looks like it makes sense then call your CPA to discuss. Take Control of your Finances and Make Life Happen!
Point of fact is that the majority of small business loans have a personal guarantee associated with them and therefore the house is still at risk. A strategy we suggest with many of our clients is to use the home equity (via a cash out refinance transaction) to satisfy the needs for the business. The main reason for doing it this way is that you can usually borrow the money out of your house for two and sometimes up to four percentage points cheaper than a traditional business loan. In a recent case study a client was buying out their business partner and needed to remove the partner from the current $400,000 business loan.
Traditional banks were offering a commercial loan around 8.75% and we were able to provide the client with a 30-year fixed rate mortgage for only 5.75%. We then instructed their CPA to draft a private note from the clients as individuals to their business in order to claim this deductable expense that the commercial loan would have provided. Now there is some leeway on how you can structure this private note but their CPA left the rate the same so it was a wash.
End result: The client was able to buy out their partner much quicker than going the traditional route and at a much lower cost than their CPA originally thought. The client was able to save $812/month or nearly $10,000 per year in cash flow resulting in close to $300,000 in savings if they carry the loan to term. While this is not always an option, you should investigate if this strategy may be right for you? Ask your mortgage planner to run a scenario and if it looks like it makes sense then call your CPA to discuss. Take Control of your Finances and Make Life Happen!
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