Many small business owners need access to money before their company has strong revenue, established credit history, or enough assets to qualify for traditional business loans. If you own a home, one financing option you may consider is a home equity line of credit, also known as a HELOC.
A HELOC can provide flexible access to funds based on the equity in your home. Some entrepreneurs use a HELOC to start a business, purchase inventory, manage cash flow, or cover early business expenses. Since a HELOC is secured by home equity, it may offer lower interest rates than unsecured business loans or personal loans.
However, a HELOC is not risk-free. Your home equity serves as collateral, which means failure to repay the credit line could lead to foreclosure. Before using a HELOC for business financing, small business owners should understand how it works, how it compares to other financing options, and what risks come with borrowing against personal assets.
What Is A HELOC?
A HELOC, or home equity line of credit, is a revolving line of credit that lets homeowners borrow money against the equity in their home.
Unlike a home equity loan, which provides a lump sum, a HELOC lets you borrow as needed up to a certain credit limit. This can give business owners more control over how and when they use funds.
For example, instead of taking one larger loan amount upfront, you may draw from the credit line when you need money for purchasing inventory, paying vendors, covering marketing costs, or handling seasonal business expenses.
Because a HELOC is a line of credit, you generally pay interest only on the amount you borrow, not the full approved credit limit.
How Does a HELOC Work?
A HELOC has two main phases: the draw period and the repayment period.
Draw Period
During the draw period, you can borrow from the credit line as needed. The draw period of a HELOC usually lasts 5 to 10 years, though a 10-year draw period is common. Monthly payments during the draw period may only cover interest. This can help preserve cash flow during early business operations, but it also means your loan balance may not decrease unless you pay more than the required amount.
Repayment Period
Once the draw period ends, the HELOC enters the repayment period. The repayment period of a HELOC can last from 10 to 20 years, depending on the lender and loan terms. During this period, you repay both principal and interest, and you can no longer borrow from the credit line.
This payment change can be significant. If your business income is inconsistent, make sure you can afford higher monthly payments after the draw period ends.
How Much Can You Borrow With a HELOC?
The loan amount available through a HELOC depends on your home value, mortgage balance, income, debt, credit report, and lender requirements. Home values can impact the credit limit available on a HELOC because lenders use your home’s value to calculate available equity.
The maximum borrowing amount for a HELOC typically reaches up to 80% to 85% of the home’s value, minus your existing mortgage balance.
Most HELOCs require at least 15% to 20% equity in your home.
Some lenders may allow a HELOC up to a larger loan amount, potentially as high as $750,000, depending on your home equity and qualifications.
For example, if your home is worth $500,000 and your mortgage balance is $300,000, you have $200,000 in home equity.
- If the lender approves borrowing up to 80% of the home’s value, multiply the home value by 0.80:500,000×0.80=400,000
- Subtract the mortgage balance:400,000−300,000=100,000
In this example, your potential HELOC credit limit could be around $100,000, subject to approval.
HELOC Requirements for Business Owners
Although you may use HELOC funds for business work, a HELOC is usually a personal loan secured by your home, not a business loan. That means lenders focus heavily on your personal finances.
Credit Score
Common HELOC requirements may include good credit scores. Lenders may review your credit history before approval.
Home Equity
Common HELOC requirements may include sufficient home equity. Most HELOCs require at least 15% to 20% equity in your home, though lender requirements vary.
Income Requirements
Common HELOC requirements may include reliable income and a manageable debt-to-income ratio. A debt-to-income ratio under 43% is typically required by many lenders. Your debt-to-income ratio compares monthly debt payments to monthly income. Lenders use this number to decide whether you can afford another loan payment.
Small business owners may be able to include business income in their debt-to-income ratio, depending on lender rules and documentation.
Approval Process
A lender may review tax returns, bank statements, profit-and-loss statements, mortgage information, and your credit history before approval. Approval for a HELOC can take as few as 5 business days with some lenders, though timing depends on appraisal requirements, underwriting, and how quickly you provide documents.
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