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SBA Business Acquisition Financing and Home Equity Loans

Posted by Doug Grindstaff in Articles

Many who are embarking upon the opportunity to acquire an internet business have funds in a number of places, but those funds are not always liquid. The money might be tightly tucked away in a retirement fund, an investment vehicle or might be in the form of equity in a residence. While the United States very recently went through a big housing crisis that had a crushing impact on the value of homes, there are opportunities available to those with equity in their home to use such equity to help fund a portion of an eCommerce or Digital acquisition.

Of course, by including a home as collateral or otherwise securing the acquisition of a business with a home or your equity in it, there is a certain amount of risk associated with poor business performance. Besides this and other risks associated with funding an acquisition with the equity in your home, the point is that the possibility does exist. The question really comes down to your loan-to-value (LTV) ratio, which is a fancy way of identifying the ratio between the home mortgage as a percentage of the total appraised value of the home. For example, if a home owner borrows $200,000 to purchase a house worth $250,000, the LTV ratio is $200,000 to $250,000 or $200,000/$250,000, or 80%. The equity in the home would be 20%.  The higher the LTV ratio, the riskier the loan is for a mortgage bank.

While there are no hard and fast rules for what banks will entertain with respect to providing a Home Equity Line of Credit, or what your risk level should be (since that’s primarily a question you have to live with as both a home owner and a business owner), but any equity less than 50% in a home would likely be considered relatively high risk. If your LTV is lower than 50%, thus your equity is greater than 50%, then you might have some opportunities available to you to borrow against the equity you have in your home in order to fund a business purchase. In order to best understand what opportunities you have available to you, try to identify the fair market value of your home and the payoff amount on all your mortgages.

Once you’ve identified that you would qualify for a home equity loan, and that such loan proceeds could be used to supply a down payment for an SBA-backed loan to finance a business, you should then look at the financials of the target business and identify whether the business can properly cover your acquisition loan and that the business earnings are high enough to pay down the home equity loan plus properly fund your cost of living. It’s also a good idea to check with a tax specialist to ensure that you set up your business and any earnings you make from it in a way that best suits your needs.

Also, before you take the step to pull all your funds out of your house for a down payment, make sure it won’t jeopardize the deal and structure of the deal in case the equity (or partial equity) would be needed to help secure a loan. Banks all tend to have their own underwriting policies and procedures, so it’s best to understand the policies before taking any steps to pull out the equity in your home.

If you have any questions on financing, rather with respect to the possibility of financing a business acquisition with a home equity loan, or some advice regarding SBA financing, or any other questions, we are here to help. Just hit the Contact Us button and we’ll be ready to help.