Pros and Cons of Using a Mortgage to Fund a Business
Mortgage My Home - What!?!
This is what you might be thinking as you read this article. Why should you mortgage your home in order to start a new business - especially during a recession? One reason might be that it’s the best you can do in terms of raising startup capital. Another reason you might use your home as collateral is that your credit isn’t strong enough to obtain a business loan. The real question is, should you mortgage your home to start a business, or should you wait?
Arguments in Favor of Using a Mortgage
Using a mortgage to fund your business can be easier than other means of obtaining funding for your business. Because you will be using your home as collateral, the loan will be easier to obtain (especially if you require a large amount of cash for your business). Also, the loan can be drawn in such a way that doesn’t add too much to your monthly mortgage payment. Finally, if you use a mortgage to fund your business, you will have motivation to ensure that your business doesn’t fail - you won’t want to lose your home.
Arguments Against Using Your Mortgage to Fund a Business
Your home is the place where you live. If your business were to fail (as many do in their first year, and even more do in their first five years), then your home is also at risk. It might be better to avoid taking out a loan against your home just to start a business.
There are other reasons, too, why you might want to avoid mortgaging your home to fund a business. First, it blurs the line between profits your business makes and your own money. Why? Because your profits will need to help pay back your mortgage. What happens when you have to choose during a slow month whether you will pay employees or pay your mortgage broker back?
Another reason you might want to avoid taking out a mortgage to fund your business is that you might want to avoid having to pay more back than you borrowed through interest.
Finally, even though you will have collateral (your home) it may still be difficult to obtain the money you need to start your business. For example, your lender may not be convinced that your business idea is solid enough to bring in a profit. In this case, no matter what you do you might not get a loan, or if you do, it might not be advisable.
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What to Do
Only you can really determine the right thing to do in this situation. However, like with borrowing from your 401K to start a business, you only want to borrow against your home if you know that you are responsible enough to pay back the loan. If you might fall behind on your payments, then you should avoid taking out a mortgage. If your business is in a speculative area, then you might want to forgo the mortgage route. Finally, you should only take out what you need for your business and nothing more.