Should I use a HELOC to fund a side hustle?

Side hustles can put extra cash in your bank account to pay down debt, build your emergency fund, or add some wiggle room to your monthly budget. Flexibility is another plus, since you pick a hustle that matches your skills, interests, and schedule. 

If your side gig idea takes money to get off the ground, a HELOC can come in clutch. Plenty of startups use loans to build their businesses. Funding a side hustle with home equity isn't that different. 

Here's what we think you should know about using a HELOC for business. 

Can you really use a HELOC to launch a side hustle?

If you qualify for a HELOC, you could use it to fund a side hustle. A benefit is that a home equity line of credit may be easier to get than a business loan. A drawback is that HELOCs are tied to your home.

How does a HELOC work? A HELOC is a line of credit that's secured by your home. That means your home is a financial safety net for the lender. If you don’t repay the loan, the lender could sell your home to get the money you owe. This guarantee makes HELOCs one of the cheapest ways to borrow.

With a HELOC, there's a draw period that comes first. You can borrow, repay, and borrow more as often as you like, up to your credit limit. You can tap into your credit line as needed and use the money for whatever you like, which includes side hustles.  

Then comes the repayment period. You can’t borrow more, and you’ll make monthly payments until the loan is repaid.

The amount of equity you have, along with your credit scores, income, and debt, influences how much you can borrow. What is home equity? It's just the difference between what you owe on your mortgage and your home's value.

When home equity meets entrepreneurship: The advantages

It might seem unusual to use home equity to start a business, since business loans are a thing. But not everyone can qualify for a business loan. A HELOC could be a viable option for you if you're ready to be your own boss. 

What are the pros and cons of using home equity? Let's start with the upsides. 

• It may be easier to qualify for a HELOC than a business loan, especially if your business is still in the idea stage. 

• Lenders can be generous with HELOC amounts if you qualify for the loan and you've built up a decent chunk of equity. 

• HELOCs typically have lower interest rates than credit cards, especially for people who have good credit scores. 

• A HELOC is flexible, so you could use it to pay for whatever you need to get your side hustle started. 

• Lenders can offer a range of terms so you can choose the HELOC that fits your needs and budget.

Using your home equity for small business expenses could help you protect your emergency fund. It’s also a way to avoid cash-flowing your business expenses out of your regular monthly household budget. One more benefit is that on-time payments to your HELOC could help you build credit. That could be useful later on if you decide to apply for a business loan to scale your side hustle into a larger operation. 

The catch: Risks of using your house to hustle

Funding a side hustle with a HELOC has a few downsides. You'll need to weigh them against the positives to decide if it makes sense to use your home equity to start a business. 

Some key risks to consider: 

• A HELOC is secured by your home, so if you can't repay what you borrow, you could lose your home. 

• If your HELOC has a variable interest rate, that means your rate could go up and your payment could too.

• Late or missed payments on a HELOC could hurt your credit score. 

• HELOC interest is only tax-deductible if you use the money for home improvements, at least through the end of 2025. 

Is a HELOC right for everyone who wants to start a side hustle or business? No. Could using home equity to start a business work for you? Maybe, if you understand the risks and you’ve considered where HELOC payments fit into your budget. 

Signs you might be ready to use a HELOC for your business

You may never feel 100% ready to pull the trigger on a side hustle, but that's okay. In fact, a little uncertainty could be a good thing if it challenges you to work hard so that your hustle becomes successful. 

Here's how to tell if you should greenlight funding your side hustle with a HELOC:

• You have a good idea of how much money you'll need to start your hustle and maintain it until it's profitable. 

• You've crunched the numbers on how much equity you have in your home and are confident you'll be able to borrow the amount you need. 

• Your credit score is in good shape, your existing debt is within reasonable limits, and your income is reliable. 

• You've compared HELOC rates and estimated the monthly payments to make sure it's a good fit for your budget. 

• You've talked over your decision with your spouse or partner, and they've shown support for your side hustle idea and using a HELOC to fund it.

If you've missed one (or all) of those signs, then you may need to think a little more about whether using home equity for a small business makes sense. 

Red flags to watch for before you borrow against your home to start a business

When could using a HELOC to start a side hustle be a mistake? You have to judge that for yourself and consider the details of your situation. In the meantime, keep an eye out for these warning signs.

• After a lengthy downward trend, HELOC rates are starting to edge up or you're seeing rates rise and fall rapidly day to day. 

• You've heard rumbles about layoffs or reduced hours at your job, and you're worried your position might be at risk.

• You're not clear on how much money you need to borrow to start your hustle, or whether your idea is likely to succeed. 

• You don't know your credit scores, or you have bad credit. 

• Your spouse or partner isn't on board with the idea of borrowing against your home to start a business. 

The worst outcome from using a HELOC to start a side hustle is losing your home. If you're concerned that there's even a remote chance of that, explore other loan options. 

Smart ways to fund your side gig if a HELOC isn’t right

If you have good credit and a steady income, you might consider credit cards or a personal loan to fund your side hustle goals. 

Credit cards let you charge expenses for your hustle as you need to, and you might earn some valuable rewards on those purchases. A personal loan, meanwhile, puts a lump sum of cash in your bank account that you could use to cover side hustle costs. 

What's the difference between a personal loan vs. a HELOC?

• A HELOC is tied to your home. A personal loan is unsecured, which means you don't need to use your home or any other assets you have as collateral. 

• Personal loans usually have fixed interest rates, while HELOCs more often have variable rates. (Though some lenders, including Achieve Loans, offer a fixed-rate HELOC.)

• HELOCs may give you up to 30 years to repay what you borrow. Personal loans tend to have terms that range from one to five years. 

• A personal loan is one and done. Once your loan closes, you can’t borrow more. A HELOC works more like a credit card. During the draw period, which typically lasts for several years, you can use your credit line as you need it. 

If you think a personal loan might be the better deal, compare rates and terms. Get a quote to find out how much you could borrow and what you'll pay to make your side hustle dreams a reality.