Small Business Financing: Using Your House to Start a Business

It all starts with an idea, and all businesses do. Then, as the idea wants to become a reality, it meets a possible roadblock: financing. Yes, financing is not an assurance your business will thrive; it’s not even an assurance that it will survive. But as the most prominent companies today know, you can’t make your business idea grow without proper financing. A quick look at Facebook should tell us that.

Today, everyone knows Facebook. With over 2.8 billion active monthly users, Mark Zuckerberg’s idea, which was hatched at Harvard University, has made him a billionaire worth over $100 billion. What many don’t know is the Harvard undergrad also made the rounds, pitching his social media business to a host of investment portfolios.

And when Mark started his first pitches, he’s not as energetic as he is today. In fact, Peter Thiel, co-founder of PayPal and one of the biggest initial investors of FB, noticed that Zuckerberg did a lot of staring at the desk when he pitched the business to him. In short, the FB founder was not as articulate.

Well, you can always pitch to a slew of money-waving investors to start your small business. That’s a given. But if you’re in a hurry and you need to buy a business outright, using your house to buy one is wise. Here’s how.

Cost of the Business

For many, it’s always confusing to think of getting financing from your property, especially if you’re still paying for its mortgage. But one of the greatest advantages of owning a house is equity. It’s this equity that allows you to purchase a business you seek. By taking out a second mortgage, you can make the most of this equity. Technically, a second mortgage is known as the Home Equity Line of Credit (HELOC). Alternatively, it’s also called one’s home equity loan.

The first step you need to do is to find out how much the business you want to buy will cost. Indeed, you must know firsthand how high the price tag of your sought-after business.

Most importantly, you need to know how financially sound that business is. Of course, there’s no sense in buying a business when it’s not profitable. Unless you’re a Warren Buffett and could wave your investor magic to turn a struggling company into a stellar one, you should stay away from non-performing lousy businesses.

To make this all happen, you will have to put a team together to evaluate the business. Call them your acquisition team. This may include an accountant, your very own banker, and a lawyer. Their job is to scrutinize the potential of the business.

business woman

Know Your Home’s Equity

After which, you should know how much the equity of your home is. By doing so, you will be able to know if you have what it takes to purchase a business. It’s actually a simple process. Equity is simply the value of your home minus any obligations you have against it. So it’s the amount you get after you pay your mortgage fully.

What if you haven’t actually paid your home loan? Will you still have equity? Indeed, you still have equity if you haven’t fully paid your mortgage loan. To arrive at your equity, just take note of your total home value and subtract the amount you owe. So if your house is worth $250,000 and your remaining loan is at $80,000, then your equity is $170,000. That value is useful to take out a second home loan.

Then again, different lenders will arrive at different values. Some will give but a percentage of your property’s fair market value. That could be 70% to 80%. So instead of subtracting your obligations from the fair market value, you will have to subtract them from a set percentage.

So if your lender allows but 80% of the fair market value, you’ll have to multiply 0.8 to $250,000. The answer is, of course, $200,000. That will be the amount you should be getting.

If the numbers stress you, then getting the services of a trusted mortgage broker should be sound. To boot, the broker will save you a lot of legwork. Even better, he will make the whole process easily understandable, allowing you to make the process as sensible as can be. Not only will he speed up the process, but also he will help you make the right decision as to which loan options are best.

Process Your Loan

A mortgage broker will help process your loan. When your second mortgage has been approved, the money can easily be transferred via your bank account or whatever method suits you best, preferably your checking account.

With the money, you can then proceed to issue a personal check to purchase the business. Or a cashier’s check is also another option.

Seal the Deal

Before you have the check ready, have your documentation ready to transfer ownership of the business. This is where your acquisition team will have to make sure everything works as smoothly. Well, things should be seamless now that you have the money.

Share on facebook
Share on twitter
Share on tumblr
Share on reddit
Share on pinterest
Share on linkedin
Scroll to Top