Refinancing Business Debt with HELOC: A Smarter Way to Save
Summary
This document explains how refinancing business debt with a Home Equity Line of Credit (HELOC) can be a strategic way to save money and manage cash flow. It describes the basics of how HELOCs work, highlights their benefits—such as flexible borrowing, interest-only payments during the draw period, and regulatory protections—and discusses how separating business and personal debts can simplify financial management. It also notes potential risks and alternative financing options that business owners should consider before using their home as collateral.
“Refinancing expensive MCA or Short-Term business debt with a HELOC can be a game-changer for entrepreneurs. It not only offers lower interest rates but also provides the flexibility to manage cash flow and reinvest savings back into your business,” says Todd Rowe, President of BitX Capital.
When you use a HELOC, it functions similarly to a credit card, letting you borrow funds up to a predetermined limit. You pay interest only on the money you withdraw during the draw period. Consequently, consolidating business debt with a HELOC often appears attractive for several reasons.
However, you must define your goals before adopting this strategy.
What Is a HELOC, and How Does It Work?
A HELOC provides a line of credit that lets you borrow against your home’s equity. Typically, lenders approve a maximum loan amount equal to 80-85% of your home’s value minus your mortgage balance. After evaluating your application, lenders determine your borrowing limit based on factors like your credit score, employment history, income, and debt-to-income ratio.
During the draw period, which usually lasts ten years, you access funds as needed and make interest-only payments. Once the draw period concludes, you enter the repayment phase, during which you must make monthly payments that include both principal and interest, and you cannot borrow additional funds.
HELOCs serve multiple purposes, including debt consolidation, funding business expenses, covering tuition costs, and even purchasing investment properties. Nevertheless, because you secure a HELOC with your home, you should carefully review the terms before proceeding.
Why Use a HELOC to Refinance Business Debt?
Entrepreneurs and small business owners can use a business HELOC to obtain capital for starting or expanding their businesses. In addition, a HELOC offers flexibility to access extra cash—up to a set limit—when necessary, and you only make interest payments during the draw period. Regulatory protections, such as the Truth in Lending Act (TILA) and other consumer laws, also provide confidence that lenders will not engage in predatory practices.
Furthermore, the funds you draw from a business HELOC remain separate from personal debts, simplifying the process of tracking and recording business expenses and profits. This separation helps reduce confusion that often arises from juggling multiple debts with different payment amounts and deadlines.
Moreover, you can benefit from lower interest rates compared to credit card debt and other short-term loans. Nonetheless, you should consider alternative financing options, such as business credit cards or microloans, which help build business credit and do not require using your home as collateral.
Pros of Using a HELOC
If you manage a HELOC wisely, it can help you advance your business. You gain flexibility by borrowing only the amount you need, and the interest-only payment phase proves useful when cash flow is tight or you want to strengthen your business credit score.
When the draw period ends, you enter a repayment period that can last up to 20 years. To maintain financial discipline, consider opening a separate bank account for your HELOC funds and use them exclusively for business expenses.
Because you must pledge your home as collateral, you risk losing your house if your business fails or you cannot make the payments. Therefore, you should weigh this consequence carefully before choosing this financing option. You might qualify for other solutions that do not require putting your home at risk.
Cons of Using a HELOC
Pledging your home as collateral for a HELOC means you could lose your property if you fail to make timely payments. This risk deserves serious consideration before you use a HELOC for business purposes. Additionally, HELOCs usually feature variable interest rates, which may increase your costs if rates rise.
Nevertheless, by keeping a strict budget and borrowing only what you can repay quickly, you can take advantage of lower interest rates and save money.
If you hesitate to decide on a HELOC for your business, explore alternatives like business credit cards and microloans. These options often prove easier to qualify for and help you build your business credit.
If you manage your spending well, these alternatives can facilitate business growth. Conversely, if you seek a longer-term solution, a traditional business loan may suit you better.
Tips for Making It Work
By using a HELOC responsibly, you can build wealth over time. Avoid using it for unnecessary expenses; instead, focus on growing your savings or investments. Doing so will make it easier to pay off your HELOC balance. Additionally, aim to keep your credit utilization low to maintain a strong credit score, which can help you qualify for other types of financing.
Because HELOCs typically offer lower interest rates than other loans, including credit cards, you may even be able to deduct the interest on your taxes. A HELOC delivers financial flexibility for significant expenses, such as financing home improvements like a new kitchen or bathroom.
You can also use it to pay off higher-interest debt, including credit card balances and personal loans. Furthermore, it acts as a safety net for unexpected events, such as major car repairs or sudden illnesses.
Why Is a HELOC the Best Choice?
For entrepreneurs and small business owners, a HELOC can serve as an effective financing solution. You can access extra cash (up to a specific limit) for various startup costs, such as purchasing equipment or investing in marketing. Since the credit line is revolving, you only pay interest on the amount you borrow, and the rates are generally competitive compared to other options.
However, remember that a HELOC represents a secured loan backed by your home and requires you to pledge personal assets as collateral. You will also encounter upfront expenses, like an appraisal, and ongoing costs, including a variable (and likely rising) interest rate.
Alternatives to a HELOC, such as business loans or credit cards, may better meet your needs. Carefully explore your choices to ensure you make the best decision for your business.
Final Words: Refinancing Business Debt with HELOC
Utilizing a HELOC to refinance business debt provides a strategic option for savvy entrepreneurs. Even so, you must weigh the benefits against the risks.
If you prefer a secure and structured financing approach without managing a HELOC’s complexities, consider working with BitX Capital.
BitX Capital stands out as one of the leading loan providers in the industry, offering personalized solutions tailored to your business’s unique needs. Our flexible loan products deliver the capital you require to grow and thrive, without risking your personal assets.
Thanks to competitive interest rates and a commitment to transparency, we enable business owners to make informed financial decisions.
Whether you want to invest in new opportunities or consolidate existing debts, BitX Capital is ready to support your journey to success. Choose us for a smoother, more secure path to financial growth! Call now to discuss your funding requirements: 203-763-1430 ext. 101.
FAQs: Refinancing Business Debt with HELOC
Most lenders require at least 15%–20% equity in your home. In other words, your mortgage balance should not exceed 80–85% of your home’s current market value. The greater your equity, the larger your potential credit line.
Yes, you can, but proceed with caution. Since the HELOC is a personal loan, you remain personally liable, even when using funds for a business entity. To avoid complications with liability or accounting, document the loan clearly and consult a legal or tax professional.
Some lenders might inquire about your intended use, especially for large amounts. If you mention business purposes, they may scrutinize your income and business stability more closely. Being transparent helps build trust and smooth the approval process.
Possibly. If you use HELOC funds exclusively for business purposes, you may deduct the interest as a business expense. However, your specific situation and local tax laws determine eligibility. Always check with a tax advisor to ensure compliance.
If your home’s value declines, your available credit may decrease, or your lender may freeze the HELOC. This scenario can create problems if you depend on it for ongoing business expenses. Therefore, you should maintain backup financing options and avoid overleveraging.
