Read This Before Using Home Equity for a Startup

Like many, you’ve dreamed of owning your own business since you could walk–or close to it. The allure of building something greater than yourself, creating jobs, and supporting your local economy calls you. But finding startup capital or a startup investor continues to challenge most entrepreneurs. Using that home equity for a startup certainly looks enticing right now, doesn’t it? But before you take that plunge, we have seven factors to consider in your unique financial situation.

home equity

1. How Much You Still Owe

No, not just on your mortgage. Itemize all of your debts and monthly expenses, personal, business, alimony–all of it. Write them down along with the payments and terms. Putting this in your face will help you assess how much you need month to month to make all of these payments, plus a payment on your MT Pleasant refinance.

Keep in mind, as a startup, you may not make a profit right out of the gate. It’s typical for an entrepreneur to overextend a little to pursue this passion. But know what you’re working with upfront to avoid surprises later.

2. The Amount of Equity

Do you have significant home equity for a startup? It’s tempting to look at $20,000 or so in equity and think every little bit counts. But if you were going to pull this for a startup, you’d have to pull all of it. That means refinancing your home at 100%, which is risky. Every shiny new startup has a chance to succeed and win big. Cough. Cough. Uber. But many startups fail to connect with their intended audience and don’t get off the ground. Ideally, you have enough equity that you can take a percentage of it in the refinance, so you don’t overleverage your house.

3. Amount in Savings

You’re pulling money from everywhere to chase this dream. Your commitment to pursuing something bold is admirable. But never spend your last cent on your startup. If you’re planning to start a business, start putting everything you can from your 9-5 now. Have an emergency fund you use to make personal payments while revenues rev up and your startup marketing starts paying off. That money won’t last forever, so you’re still motivated to make it happen. But it won’t all be an uphill battle when you position yourself for success.

4. Size of Nest Egg & Types of Investments

Let’s not touch investments that have penalties and get taxed. But if you have substantial contributions in a ROTH, you can basically count this as liquid savings, given the fact you can withdraw contributions at any time. Please don’t make this your first place to go for the capital. Lost investment growth is typically more expensive than home equity interest. But this is a factor that contributes to your financial health during the startup phase of your new business, so evaluate all the angles.

5. Appreciation of the Home

The value of your home may have gone up significantly since you bought it, especially over the past year. According to Zillow, the average home is up 13.2%. In some parts of the country, this appreciation rate is even higher. One of the big winners in the real estate frenzy is the small town where real estate tends to remain flat. We are seeing even greater equity growth as more people work from home after the pandemic. They’re leaving more expensive cities because they can now work from anywhere with decent internet.

6. Anticipated Cash Flow

As we’ve pointed out, a lot of businesses don’t immediately turn a profit. But you will have cash flow. This will allow you to meet obligations month to month while you grow your customer base. Do some homework to find out what kind of cash flow you can expect. How long it will take before this business is not just supporting itself but also your family?
Lay this out in your business plan. Yes, you certainly need one of those.

7. The Type of Business You’re Getting Into

Some businesses have more inherent risk than others. If you’re putting your house on the line, then this business should be well thought out with a relatively strong chance of succeeding. For example, certain industries like restaurants and retail have a high risk of failure without careful management by someone who knows the business side of things. That’s probably not a former server, line cook, or stock person unless you have a mentor. This isn’t to trample anyone’s dream, but bringing people around you who have is a smart idea if you haven’t run a business before.

Using Home Equity for a Startup

Whatever your dream, we encourage you to pursue it. Put your heart into it. But do go in with a plan. Using your home equity for a startup can certainly be a part of that strategy. But consider all the angles to position yourself for successful startup and growth.

The post Read This Before Using Home Equity for a Startup appeared first on The Startup Magazine.

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