“Leveraging” is the process of converting the equity in your home into cash. Freeing up cash in this method can give a budding entrepreneur working capital for a new business venture.
There’s a number of advantages and disadvantages in using your personal residence to jump start a new business. I should know; my husband and I leveraged the equity in the family homestead to start up a new company. Thanks to prudent management, we’ve been weathering the recession relatively unscathed, though we’ve had our moments of anxiousness and sleepless nights.
If you are thinking about leveraging your home for working capital to start a new business, the pros and cons we experienced may help you make up your mind.
Pros of leveraging your home for cash
Better chance of securing a loan. Banks aren’t too keen on loaning money on a business gamble and for an entrepreneur trying to break into a new business, loans can be tough to find because of the risk involved. Putting up your house as security may well be the only option possible for freeing up cash for a new business.
Better interest rates. Interest rates are determined by a number of factors including credit worthiness and what an entreprenuer is willing to put up as collateral. We discovered that interest rates were lowest when secured against our house.
Extra perks offered by the bank. By borrowing against the equity in our home, we became a “preferred customer” which came with some pretty cool perks. In addition to having a personal banker to help us with our finances, we received benefits such as fee free checking, free checks, free safe deposit box, free money orders and travelers checks, AND a waiver of the loan origination fee and appraisal. We even got a free set of Pyrex with insulated totes, something I didn’t think banks even did anymore. These freebies saved us nearly $2200 the first year, and about $600 a year thereafter.
Cons of leveraging your home for cash
The risk of repossession & ruined credit. There’s only one disadvantage to leveraging your home for a new business, but it’s a big one. If the business fails for whatever reason and the mortgage payments can no longer be met, the house will be foreclosed on which can be devastating for your family.
A foreclosure means more than just losing your house, it impacts your credit score and may also saddle you with a tax penalty. This excellent article details the consequences of a foreclosure and is a must-read for all homeowners.
If you are an entrepreneur who is leveraging equity for a new business, the only way to lower the risk of foreclosure is by not borrowing more against your home than you can afford to lose. Borrowing cautiously is key to finding start up cash for a business without putting your home at risk.