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As an entrepreneur, you work hard keeping your own business afloat. But unexpected costs can sink even the most creative sole proprietors or freelancers. Rather than racking up steep financing fees through private lenders or credit cards, leveraging built-up home equity could be a strategic funding source to infuse extra working capital or cover emergency bills when running your self-made small business.
What is a Home Equity Loan?
Whether you fully own your home or have an existing mortgage, a home equity loan utilizes untapped property value you’ve paid toward and appreciation over time as collateral to secure lower-interest financing for virtually any purpose. This functions like a second mortgage using your equity. Rates are often more favorable than other options.
Qualifying is easier for the self-employed than traditional loans since underwriting focuses more on equity percentage and credit scores than volatile income. Utilize an online mortgage calculator to estimate how much equity borrowing power you have.
Uses for Home Equity Financing
A lump sum home equity loan disbursement or revolving line of credit offer greater flexibility than tapping 401k retirement funds prematurely. Eligible uses include:
- Covering operating expenses during lower-income months
- Boosting struggling cash reserves
- Purchasing essential equipment
- Paying off high APR debts
- Renovating physical business locations
- Expanding locations or staff
- Bridging income gaps due to disability/illness
- Repaying startup investment capital to keep companies running
Risks and Drawbacks
Though more affordable and accessible than many financing methods, equity loans do stake your property as collateral, risking foreclosure if unpaid. This type of borrowing also erodes the equity safety net you’ve built for retirement or emergencies. Shop terms carefully and only borrow what you can reasonably repay.
For creditworthy home-owning entrepreneurs needing an occasional income boost, home equity tapping provides strategic access to capital that offers flexibility and better rates than most small business loans. Handle with care and as a temporary stopgap during self-employment slow spells.
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