Can you use a HELOC to start a business? Pros, cons, and alternatives

Starting a business costs money before it makes money. Figuring out where to get that funding is one of the first big decisions you'll face as an entrepreneur.

Yes, you could use a home equity line of credit, or HELOC, to start a business if starting a business is a use allowed by your lender. Using a HELOC for business is a route homeowners consider because of the potentially lower rates and the flexibility to borrow, repay, and borrow again up to their credit limit. The trade-off is that you could lose your home if you don’t repay the loan. 

This article covers how a HELOC for business works, the pros and cons, when the math makes sense, when it doesn't, and alternatives worth comparing.

How a HELOC works for business funding

A HELOC is a second mortgage. It’s a revolving line of credit secured by the equity in your home. 

If you’re approved for a HELOC, you can use the money for just about anything. Even so, it’s normal for lenders to impose some restrictions on loan use. 

Some lenders prohibit business use of HELOC funds, or prohibit certain types of businesses. If you want to get a HELOC to start a business, the first thing to ask any lender is whether your business plans are a permissible use. If so, expenses like equipment, inventory, marketing costs, office lease deposits, and working capital, are fair game. 

A HELOC works primarily in two phases:

Draw period (typically 5–10 years). During the draw period, you could borrow against your credit line, repay what you've used, and borrow again up to your credit limit. This flexibility is useful for businesses with uneven cash flow. 

Repayment period (typically 10–30 years, depending on your lender and the term you choose). Once the draw period closes, you can no longer borrow additional funds. You repay the outstanding balance over the remaining term.

Most HELOCs have variable interest rates, which means your payment could change over time as market rates move. Achieve Loans offers a fixed-rate HELOC, which means your rate stays the same for the life of the loan. For business owners budgeting around predictable costs, that stability matters.

Pros of using a HELOC to fund a business

There can be real advantages to using a HELOC for business funding, especially when you're just getting started.

• Lower rates than many business financing options. HELOC rates are typically lower than business loan rates and credit card APRs. A fixed-rate HELOC from Achieve Loans sets your rate for the life of the loan, so your payment won’t change if market rates rise.

• Easier to prequalify for than a business loan. Business lenders often require an established revenue history, a formal business plan, and business credit. A HELOC is based on the equity in your home, your personal credit score, and your income, which could make it easier to prequalify if your business is still in the idea stage. The U.S. Small Business Administration (SBA) 7(a) loan program, for example, typically requires an operating business with demonstrated profitability and strong creditworthiness. A HELOC doesn't.

• Flexible access to funds. During the draw period, you could borrow against your credit line and repay it as revenue comes in, then borrow again as your needs grow. That flexibility is useful for businesses with irregular expenses.

• A good fit for freelancers and consultants. If your business income fluctuates by season or client load, a HELOC could help smooth out cash flow. 

• Protection for your emergency fund. Using a HELOC for business expenses means you don't have to drain personal savings to get started. Your financial cushion stays intact.

• On-time payments could strengthen your credit profile. Consistent, on-time HELOC payments are reported to all three credit bureaus and contribute to your payment history, which is the single largest factor in your FICO score. A stronger credit profile could make it easier to prequalify for business financing as your venture grows.

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

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

Cons of using a HELOC to fund a business

• Your home is collateral. A HELOC is a second mortgage. If you can't repay what you borrow, you could lose your home. This is the most significant risk of using home equity for business funding, and it deserves a callout before you sign. 

• Business income is not guaranteed. New businesses often take months or years to become profitable. If your business doesn't generate enough revenue to cover HELOC payments, you're still responsible for the debt. 

• Variable rates could raise costs. Most HELOCs carry variable interest rates, which means your payment could increase if market rates rise. (Achieve Loans offers a fixed-rate HELOC, which means your rate stays the same for the life of the loan). 

• Borrowing reduces your available equity. Drawing against your home could mean less equity available for future home needs, such as a home improvement project, an emergency, or the eventual sale of the property. 

When a HELOC makes sense for starting a business

You may never feel 100% ready to pull the trigger on a business, 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 move forward with a HELOC application:

• You have a good idea of how much money you'll need to start your business 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 your monthly payments to make sure they could fit your budget. 

• If applicable, you've talked over your decision with your spouse or partner, and they've shown support for your business or side hustle 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. 

When a HELOC may not be the right choice

There are times when using a HELOC to start a side hustle or business could be the wrong choice for you. Only you can weigh the specifics of your situation. These are signals worth taking seriously. 

• 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, or whether your business idea is likely to succeed. 

• You don't know your credit score, 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 business is losing your home. If you're concerned that there's even a remote chance of that, explore other loan options. 

Alternatives to a HELOC for funding

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

Credit cards let you charge expenses for your business as you need to, and you might earn some valuable rewards on those purchases. Some business credit cards offer rewards on purchases and introductory 0% APR periods.  Know that standard credit card APRs run significantly higher than home equity rates once the intro period ends.

A personal loan, meanwhile, puts a lump sum of cash in your bank account that you could use to cover business expenses. 

What's the difference between a personal loan and a HELOC?

• A HELOC is a secured line of credit 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. 

• 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. 

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 business dreams a reality.