HELOC vs. Business Loan: Should You Use Home Equity?

Photo: Towfiqu barbhuiya / Unsplash

By Ezra Cabrera, Small Business Finance Writer · 6 min read

How we make money: Best Business Outcomes is a business funding marketplace, not a lender. We may be compensated when a business owner applies with a funding or home equity provider shown on our site. This guide explains both options in general terms so you can weigh the risks yourself.

A home equity line of credit (HELOC) is a revolving line secured by the equity in your home. A business loan is financing approved mainly on your business: its revenue, time in business and bank history. A HELOC can cost less and may be available when the business doesn’t yet qualify, but it puts your home on the line: if you can’t repay, you could lose it. A business loan keeps that risk inside the business.

Key takeaways

A HELOC is personal credit secured by your house; a business loan is credit to your company.
HELOCs often have lower rates but usually variable ones, plus closing costs and a long repayment period.
The biggest difference is risk: missing HELOC payments can lead to foreclosure on your home.
A HELOC can make sense for owners with strong equity and steady income whose business is too new or too small for a business loan.

How a HELOC works

A HELOC lets you borrow against the difference between your home’s value and what you still owe on it. Lenders typically cap the combined balance of your mortgage and the line at a share of the home’s appraised value, so the amount available depends on your equity, your credit and your income.

Most HELOCs have two phases. During the draw period, often around 10 years, you can borrow as needed and may only owe interest. In the repayment period that follows, you can no longer draw and you repay principal and interest, so the monthly payment can rise sharply. Rates are usually variable, and the lender can freeze or reduce the line if your home’s value drops significantly or your finances change.

How a business loan works

A business loan, whether a term loan, a line of credit or revenue-based funding, is underwritten mainly on the business. Funders look at revenue, time in business, bank statements, existing debt and the owner’s credit. Many require a personal guarantee, and some take a lien on business assets, but your home is not the collateral unless you pledge it. Funding can be fast for short-term products and slower for bank and SBA loans.

HELOC vs. business loan: side by side

How a HELOC and a business loan compare
Factor	HELOC	Business loan
Collateral	Your home	Business revenue or assets; often a personal guarantee
What the lender evaluates	Home equity, personal credit and income	Business revenue, time in business, bank history
Typical rate	Often lower, usually variable	Varies widely by product and profile
Upfront costs	Appraisal and closing costs are common	Origination or other fees, depending on the funder
Speed	Usually weeks (appraisal, title)	Days for short-term products; weeks for bank and SBA
If you can’t repay	Risk of foreclosure on your home	Collections, liens on business assets, guarantee claims
Builds business credit	No, it’s personal credit	Can, depending on the funder’s reporting

When a HELOC can make sense

The business is under two years old or below a funder’s revenue minimum, but you have meaningful equity and steady personal income.
The need is a long-term investment with a clear return, not a way to cover ongoing losses.
You are comfortable with a variable rate and have a plan for the higher payments in the repayment period.
You can keep careful records of how the money is used in the business.

When a business loan is usually better

The business already qualifies on its own revenue and history.
You want to keep your home out of the business’s risks.
You need funds in days rather than weeks.
You want to build the business’s own credit profile for future financing.

Two examples

These are illustrative examples, not real customers or offers.

A one-year-old design studio earns $12,000 a month, below many funders’ minimums. The owner has substantial equity and a salaried spouse. A modest HELOC for two workstations may be the realistic option, if they accept the risk to the home.
A five-year-old HVAC company earns $60,000 a month and needs a second van. It qualifies on its own numbers, so a business term loan keeps the house out of it, even if the rate is somewhat higher.

Risks to weigh before using home equity

Your home is the collateral. A slow season or a failed project can become a personal housing problem.
Payments can rise. Variable rates move with the market, and payments usually increase when the draw period ends.
The line can shrink. If home values fall, the lender may freeze or lower your limit when you need it most.
Taxes are not automatic. Whether interest is deductible depends on how the money is used and on current tax rules. Keep records and ask a tax professional.
Mixing finances. Move the funds into a business account and document every use, so business and personal money stay separate.

Questions to ask before you choose

What happens to my payment when the draw period ends?
How is the rate set, how often can it change, and is there a cap?
What are the closing costs, annual fees and early-closure fees?
Under what conditions can the lender freeze or reduce my line?
Would my business qualify for a business loan today, and at what total cost?

Frequently asked questions

Can I use a HELOC to fund my business?

Generally yes, as long as the lender allows it. Lenders evaluate you personally, not your business, and the line is secured by your home, so the risk stays with you and your property.

Is HELOC interest tax-deductible if I use it for my business?

It depends on how the funds are used, how you track them and the tax rules in effect. Keep clear records and confirm with a tax professional before you rely on a deduction.

How fast can I get a HELOC compared with a business loan?

HELOCs usually take weeks because of the appraisal and title work. Some short-term business funding can arrive within days of a complete application; bank and SBA loans take longer.

Will a HELOC show on my personal credit?

Yes. A HELOC is personal debt, so it appears on your personal credit report and affects your personal debt load.

Compare your options first

Before you put your home on the line, see whether your business qualifies on its own. One application with Best Business Outcomes is matched with funding partners whose criteria fit, and homeowners may also see home equity options. Learn more about business loans or compare term loans and lines of credit.

Check your options →

Sources

Consumer Financial Protection Bureau, What You Should Know About Home Equity Lines of Credit (updated December 2022).
U.S. Small Business Administration, Fund your business.
U.S. Small Business Administration, Manage your finances.
Internal Revenue Service, Recordkeeping for small businesses.

Best Business Outcomes is not a lender. We connect businesses with third-party funding partners and may receive compensation from them. A HELOC is secured by your home; failure to repay may result in the loss of your home. All funding is subject to each provider’s review and approval. Terms, amounts and funding times vary and are not guaranteed. This article is for general information and is not legal, tax or financial advice.