SBA vs Home Equity Loan for startup capital? I need advice.

by Stompimus. Posted on Sep 16, 2020    0    7

I know the title of this post seems self explanatory - choosing between SBAs and HELoans for startup capital, but I want to lay out my whole situation to get the best advice.

I've been approved for a home equity loan for the amount I need to launch my business - could fund in a week and start making major purchases with the bank's letter of approval. It's 65k, 7%, 30 year term, no prepayment penalties, so the min payment is $429 monthly but in my business plan I've budgeted to put aside much more monthly to pay off in 6-7 years. (The logic here is I want to get rid of the majority of this debt before a planned 5 year expansion at which point I would look for a biz line of credit.)

On the other hand, I'm working on an SBA microloan with a community organization. By their own admission, they're swamped, so I don't know how long it would take me to get the money I need, especially given the normal pace of nonprofits. Also an SBA micro taps out at $50k - although they've told me we can get the rest with various grants.

I've been advised not to use a home equity loan for startup because of the risk - but the major orgs that do SBA's here have told me their underwriting teams would want to put a lien against the house anyway. Also, $65,000 at 7% interest (SBA rate) for 6 years is a minimum ~1200 payment a month.

So with a $1200 vs a $400 payment, why would I use an SBA loan instead of a home equity?


not_mad_lad 1

I initially thought I’d do an SBA loan but interest rates are fairly high and it was going to be a minimum of 90-days after I properly submitted the fairly excessive paperwork. Wanted to move faster so ultimately ended up funding myself via my personal assets which would have been used as equity anyhow - just as you said. I could not come up with a benefit to going the SBA route for myself although I’m sure there are reasons for some folks.

  Stompimus 2

A small business advisor at a local university kept trying to tell me about all these protections I could get as an SBA loan recipient and mentioned that all SBA recipients had 6 months of their loan paid due to coronavirus. Honestly, a lien on my house is a lien on my house no matter who puts it on, and if my business isn't viable 6 months won't do shit. The best protection I would think is the option to make a much lower payment if I'm having financial troubles.

RoundTableMaker 2

incorrect. a lien on your house where the gov't guarantees 75% of the underlying loan is completely different than with just your house guaranteeing it. If you don't want to do it for a high interest rate there are other lenders that provide lower interest rates.

  Stompimus 1

What does that mean?

agree-with-you 1

>[th at; unstressed th uh t]
>(used to indicate a person, thing, idea, state, event, time, remark, etc., as pointed out or present, mentioned before, supposed to be understood, or by way of emphasis): e.g That is her mother. After that we saw each other.

arnoldkv 1


Shirtman88 2

Make sure if the business doesn’t work you have a plan to be able pay the $400 a month so you don’t lose your house. If you have a job or income that guarantees you can pay that without the business then it’s less risky.

But if you need the business to pay it I wouldn’t risk the house.

You will quickly find out your business plan was a guess and most likely inaccurate. In my experience businesses take way more time and money than you expected to get going.

Aim to be successful but plan for the worst case that the business will burn all that cash with no return