Many people who want to start their own businesses do so for various reasons. For some, it is to achieve one’s independence and become their own boss, or simply to enjoy the convenience of working flexible hours, while challenging themselves to achieve a successful business. Yet for others, the desire to own a business stems from their ambition to make a livelihood from a skill or hobby – something which they have a natural knack for.
Although several persons have successfully achieved their dreams of becoming an entrepreneur, there are many who have not. This is often due to a major inhibiting factor, which is a lack of capital, sometimes due to an inability to borrow from traditional financing sources or lack of adequate savings or investments.
Even businesses that manage to get off the ground sometimes are stifled by a lack of working capital, which in turn, hinders production and expansion. To circumvent this issue, many homeowners are increasingly tapping into home equity loans to successfully start their entrepreneurial dreams.
Last year, Moneyed Martin, a car dealer, opted to use the equity in his home to purchase a property with a few shops that he rents. He said he was quite pleased when he became aware that he could use the equity in his home for this undertaking.
“It was through a friend that I learned about home equity. He used a home equity loan to start a business and so he told me about it.”
Today, his business is thriving and Mr Martin has had no reservations about using a home equity loan.
“I will do it again,” he declared.
Here are five points from Petal James, head of mobile sales at JN Bank to assist you with understanding how a home equity loan works and how you can use it.
- So what is a home equity loan?
A home equity is simply the portion of your property that you truly own after deducting or paying down the outstanding mortgage that is left on it.
For example, let’s say you applied for a mortgage of $2 million dollars to purchase a home for $2.8 million 15 years ago. Depending on a number of factors, such as:
- The neighbourhood where the house is located
- If the house is well maintained, has an attractive landscape, or has amenities such as a solar water heater or an automatic gate opener
These amenities could assist to increase the value of your home over the years. Your home could, perhaps, now be valued now at $18 million dollars. The equity in the home is the present value, minus the outstanding loan balance. If the loan balance on the house is, for example, $600,000, the equity, therefore, would be $18 million minus the $600,000, which would be $17,400,000. This amount would be the true equity accessible for a loan.
- Is there a limit on how much I can borrow?
Yes, home equity loans are capped at a certain percent of the current property value
- Is a home equity loan a good way of getting capital for my business?
A home equity loan does not carry the amount of restrictions as other loans, therefore, an entrepreneur can use the loan how he or she sees fit, whereas a business loan may require strict adherence on how the monies should be used. Also, using your property as security makes it a low-risk type of loan as you wouldn’t want to jeopardise the investment of where you reside. Therefore, it becomes the onus of the borrower to ensure that the equity loan is repaid and it is a secured way of expanding your business rather than getting an unsecured loan at a higher interest rate. Besides, you get a longer time to repay and more flexibility to manage your cash flow on a long-term mortgage.
- What else can I use a home equity loan for?
Apart from using a home equity loan to start or expand a business, your loan can be used for other purposes. These include debt consolidation, home repairs, to purchase another property, or for medical and educational purposes.
- Do you have any final advice?
A home equity is a valuable asset to homeowners, however, as with any other loan, wisdom should be exercised. Repaying your loan on time each month is important, so that you do not end up in arrears. We understand that things do happen over which you may have no control. Regardless of the situation, we always urge persons to peak with a representative from their financial institution the moment they are encountering any difficulty.