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Although many business owners overlook this convenient source of money, home equity is one of the most affordable ways to fund a commercial venture. Taking out a home equity loan is one of the simplest and fastest ways to borrow money for any business. For those who have accumulated a significant amount of equity, this kind of loan is ideal for providing operating capital to a budding company.

Why consider a second mortgage for a business loan?

Business loans are generally scrutinized rather carefully. If the underlying venture fails, the lender may be left with an unpaid note and devalued collateral. People who are turned down in their attempts to secure a business loan are often discouraged, because it can mean doomsday for an otherwise potentially lucrative enterprise. But if you have equity in your home and can validate it through an official appraisal (which usually costs about $300 or less), applying for a home equity loan or second mortgage is a walk in the park.

Home equity loans or second mortgages to the rescue

While some of the closing costs and interest payments on a home equity loan are tax deductible, you can get additional tax perks by using the money for business. For instance, if your company is incorporated, you might consider taking out a personal home equity loan, and arranging a separate loan agreement for the venture itself. Lend the money to your own business, instead of going to a banker for a business loan. Your company can then provide the necessary funds to pay monthly interest and principal on the home equity loan. The corporation can deduct the repayment of the loan as a business expense. If revenues are good, you can tack on extra payments of principal to retire the loan early, which will return equity to your home on a faster schedule.

If the business decides to borrow again after the loan is repaid, you can tap into the same home equity source and repeat the process, without the headaches of trying to sell other investors on the idea that your business is a good one worthy of their attention.

This strategy allows you to keep the money "in house," in more ways than one. You'll also save on fees and get lower interest rates. Using a second mortgage to finance your company is simply smart business.

Published on July 28, 2006