Priming? 2 sources of financing that entrepreneurs overlook

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One of the biggest challenges every entrepreneur faces is finding the capital to fund their vision. If you’re one of the lucky few to land a major venture capital investment, congratulations! You are one of the 0.05% of startups that have successfully navigated the venture capital route.

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For the vast majority of startup founders, however, the road to funding is stressful and arduous. In fact, only about half of all startups – according to the National Association of Small Business – survive to their fourth year, and one of their main reasons for failure? You guessed it: strapped for cash.

Still, every startup needs capital, and there are dozens of ways to get it. What is shocking, however, is how often entrepreneurs forgo the cheapest and most readily available money in favor of high interest credit cards and personal loans. Indeed, home equity is an option that is systematically overlooked by the startup community; only 7% of all small business owners who apply for loans or lines of credit do so using a home equity line of credit, and only 6% opt for mortgage refinancing, according to a recent Fed report.

To be clear, the home equity option is not for everyone, and as with all loans and lines of credit, there are strict repayment terms that come with some financial risk. But founders in a position to carefully consider and mitigate that risk may find that leveraging their home equity is one of the easiest and most affordable sources of funding for a startup.

In fact, I speak from personal experience. Here are the details:

HELOC (Home Equity Line of Credit)

My partner, Bill Osborne, and I started Nations Lending in 2003 with a $ 35,000 home equity line of credit and an $ 18,000 personal loan from my mother. Nations Lending now generates nearly $ 2 billion in loan volume per year with the help of nearly 700 employees. Without this original home equity line of credit, we would not have become what we are today.

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A Home equity line of credit is exactly what it sounds like. If your home has increased in value, you can borrow against the increase in value, or part of it, like a credit card. But unlike its plastic cousin, HELOCs come with a significantly lower interest rate than any business credit card. With a HELOC, small business owners also don’t have to take the money they’re entitled to all at once. On the contrary, they can use it as needed.

This is one of the things that makes HELOCs ideal for financing a small business because it is difficult to predict today what your capital needs will be in a month. As an added bonus, some of the interest payments may be tax deductible.

In 2003, our business couldn’t show a small business lender or the Small Business Administration the $ 50,000 to $ 150,000 in annual income that we needed to qualify for a loan. This HELOC turned out to be our proverbial lifeline; by unlocking that $ 35,000 in home equity, we got the cash we needed within days to continue growing the business.

That’s not to say small business loans are a bad choice, of course. But they’re just not for everyone, especially since many entrepreneurs won’t meet income requirements, and the loan itself could take months to materialize.

Case study: Scott Raybuck, serial entrepreneur and founder and CEO of Zuri, a CBD supply company in Ohio, is quite familiar with the benefits of a HELOC. He used $ 300,000 in the form of a home equity line of credit, along with other substantial savings, to start his Zuri business.

“Most people don’t think of it that way – it’s more traditional to separate personal and business finances,” Raybuck told me. “I think it just comes down to the loan or line of credit nomenclature – the fact that it’s called home equity. People think they have to use the funds for something related to the house or the family. This is not the case.”

A home equity line could be a great option for entrepreneurs. Just make sure you understand the terms and the risk.

Refinancing of collection

While a home equity line of credit is the best product for financing small businesses, entrepreneurs should also be aware of the cash refinancing option. This essentially turns the equity in your home into a one-time loan, which you start paying off in the form of a new mortgage payment.

Let’s face it, if you start your business at a young age, you may not have owned your home long enough for the equity in a HELOC to increase. This is where a cash refinance comes in, as it can still beat most small business loans and credit cards in terms of interest rates and repayment terms.

In a refinance with withdrawal, a homeowner obtains a brand new mortgage to pay off the old one, while at the same time withdrawing the accumulated equity. The difference between the two mortgages is returned to the owner in cash. Translation? I’m talking about cash to fund your entrepreneurial dreams, usually available at a significantly lower interest rate than your average 15-20% business credit card.

Case study: In an interview with MortgageLoan.com, Sam Craven, owner of Senna House Buyers in Houston, Texas, explained how he used his home to start a business that has since closed nearly 300 real estate deals.

“It was an easy process,” Craven told the website. “They loaned me 80 percent of the value of my house and that was enough seed money to get the ball rolling. I would highly recommend people to unlock the dead equity that is in their home to pursue their dreams. “

Every day, small business owners have the shocking revelation that there isn’t enough capital they thought they needed to get started. When this happens, home equity can be a desperate game changer.

Related: Want to Start a Business – How Should You Finance It?

But before you make a decision, you need to understand all of your financing options and carefully weigh them against each other. Speak with your lender and / or lawyer to make the best decision for you and your business.

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