If you're a homeowner, you've likely watched the value of your house grow rapidly in the past few years due to the sizzling real estate market. If you're looking for startup capital, all that equity can be even more enticing. You could sell your house, move to a cheaper home and start a business with the profit--or you could get a home equity line of credit to get the cash infusion you need to launch.
It can definitely work, says Linda Lirette, loan officer at America One Finance, a mortgage company based in Medina, Washington. The first step is determining how much capital you'll need in the first year or two. Next, decide which home equity option best fits your needs. There are many options, from refinancing to taking out a second mortgage to borrowing up to 100 percent of the appraised value of your home. She suggests consulting a mortgage broker to help you navigate the various programs available.
There's a positive side to financing your business this way--you get the cash relatively fast, and you even gain a tax benefit, as you can deduct the interest on the loan. Married entrepreneurs Marina and Matt Krueger, both 28, certainly benefited from the home equity loan they took out in July 2004. Wanting to start production on their BabyBouncy kits(which include a large exercise ball, pump and stability stand) that Marina designed for new mothers like herself, they looked toward their home for capital. "You have to really strongly believe in what you're doing to put your [home] and your family's livelihood on the line," says Marina. And the Kruegers did have faith that their Genoa, Illinois, company would be successful if they could only manufacture the BabyBouncy kits on a large scale. With that quick line of credit from their home equity, they were able to finance a larger run and pitch their product to both big retailers like Target.comand specialty boutiques nationwide. The strategy paid off: BabyBouncy now expects about $110,000 in sales in 2005, its first full year in business.
Before moving forward, research your local market, says Lirette, and ask a realtor to do a comparative market analysis to determine if the timing is right for you. And remember, adds Joe Kennedy, small-business expert and author of The Small Business Owner's Manual, "Have a realistic fix on what [your] business is going to do [financially]. It's pretty difficult to know exactly what the situation will be when it becomes time to repay that loan." It's not as dicey if you're selling your house at a profit and moving to a cheaper abode, as that's cash in your pocket, he notes. But if your house is on the line, be sure you'll be able to pay back that loan.