In Funding a Business, Your Home is Personal

A new study of recession-era spending points to a disturbing trend: More business owners are using their own personal savings or home line of credit to fund their enterprise.

In the Journal of Family and Economic Issues, University of Missouri assistant professor Tansel Yilmazer writes that starting a business often has a dramatic impact on the family finances. Especially since the downturn and dwindling availability of business loans and credit, her analysis found an increase in the number of business owners tapping personal resources for their business.

This is a dangerous game, especially if your funding method is tied to your home’s equity. That can create a ticking time bomb that could explode later, when interest rates rise, she contends.

As it happens, I have a home equity line of credit -- known to bankers as a HELOC -- and I can tell you borrowing off your home is shockingly cheap right now. My line is charging under 3 percent right now.

I recently had to put in a new heater in our home because the old one died. It cost $11,000, most of which came out of the HELOC. That changed my monthly payments by about $30. Since I had my payments set to automatically pay more than the minimum -- to pay off the balance faster -- the effective impact on my monthly outlay was zero.

My own experience shows how seductive home-line borrowing is now. Business owners can easily fall prey. You want to buy some inventory or do some marketing, so you borrow out a chunk of change, and the impact to cash flow is virtually nil. If the gamble doesn't pay off in additional revenue, it hardly seems to matter.

There's only one problem: All downturns end. At some point, interest rates will rise. With on-going uprisings becoming the norm in the Middle East and the price of oil, inflation worries may force interest rates higher sooner than later.

The cost of your home-equity payments could quickly skyrocket as a result. Many business owners could find themselves unable to service the home-loan debt. The next step is either liquidating business assets to pay the line off, or, if that's not possible, you could be looking at potentially losing your home.

Home equity lines are alluring because often the paperwork to tap into one is minimal compared with getting a business bank loan. But there's a reason financial pros advise against it -- it puts you at risk of losing your home.

Have you borrowed from your personal funds for your business? Leave a comment and tell us your story.