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You don’t have to have investors or a traditional business development bank loan to start your own small business. If you own a home or have the credit to open revolving credit card accounts, your small business financing could be a reality.

The secret to using credit cards for small business financing is to open the credit cards under the business name. If you have business credit cards, the IRS allows the deduction of every single penny of interest from those credit cards.

David Newton is a professor of entrepreneurial finance at Westmont College in Santa Barbara, California. He says there are basically two ways to use credit cards to finance a small business: 1. Asset acquisition such as purchasing equipment and supplies, and 2. Cash on hand as capital. He does; however, consider credit cards as an extremely risky way to finance a small business

“The use of credit cards should be replaced as soon as possible by more traditional bank financing and/or leasing arrangements, once the firm has reached the break-even point and monthly sales receipts can cover normal COGS (cost of goods sold) and overhead expenses.”

A more traditional approach is the home equity loan. Banks usually offer home equity loans for 125% of the property’s fair market value or FMV. For example, if your home is valued at $300,000, and your mortgage balance is only $100,000, there’s already $200,000 of equity. The bank would loan you the amount of the equity plus an extra 25% or in the previous example, $75,000. You would then have $275,000 to start your small business.

But, the credit card route allows deduction of all the interest, while the IRS limits the amount of the home equity loan for purposes of deduction. IRS publication 936 limits the amount eligible for interest deduction to $100,000 or the actual value of the home minus the mortgage balance, whichever is less.

Entrepreneur.com shows there are down-sides to home equity small business loans. “You may be asked to pay up-front fees, closing costs, or annual fees. Some home equity loans also require large balloon payments at the end of the loan, while others require higher monthly payments instead. If you choose a loan with a large balloon payment, be sure you know how you will cover the expense. In some cases you may have to borrow more money to make the balloon payment. “

The biggest risk using your home as collateral is the potential loss of your home is the business fails or the loan defaults.

Home Equity Loan. As the interest rate on credit cards and other loans continues to increase, many people have turned to home equity loans as a method of borrowing money at a low interest rate. The equity of your house is the difference between the value of your house at any given time and the amount of money you owe on the total balance. A home equity loan is a great tool for consolidating high interest loans and credit cards.

Another Mortgage – Can You Afford That?

Home equity loans are also known as second mortgages, and can provide you with many benefits that don’t exist with other types of loans. The interest rates can be much lower than credit cards. It isn’t uncommon to see equity loans which have interest rates which are at least 60% lower than credit cards. They are also tax deductible for up to $100,000. This makes them the obvious choice for those who have equity in their homes. Equity loans are flexible, and homeowners can also use a revolving line of credit to borrow money.

Security And Equity Are Required

Unlike many other loans and credit cards, home equity loans are secured. This means that your house is used as collateral. For example, if your house if worth $300,000, and you’ve paid off $50,000, you still owe $250,000. However, if the value of the house has increased from $300,000 to $350,000, you have $100,000 of equity. You can borrow money against this $100,000 by using a home equity loan. At the same time, it is important to remember that if you default on your payments, your home could be taken as collateral to cover the losses of the bank or mortgage company.

Who Will Lend To Me?

Most banks and mortgages companies enjoy providing home equity loans for their customers. A house tends to be the largest investment a person has, and many banks realize that few people will run the risk of losing it by defaulting on their payments. Because of this, home equity loans are considered to be a safe investment. Many people who have homes tend to have a more established credit history than those who do not.

What Can I Use The Home Loan For?

Many people choose to use home equity loans for remodeling their kitchens or bathrooms. Remodeling a part of your house is a great way to increase its value. It is also easy to get approved for loans which you plan on using for remodeling your home. They tend to have very low interest rates, and the amount you choose to borrow should be dictated by how you plan to remodel the home.

Another common use for home equity loans is higher education. As the cost of education continues to rise, it will become harder for many families to send their children to school. Many parents choose to use a home equity loan to invest in the education of their children. Despite this, many federal student loans have low interest rates as well, and parents will want to weigh all their options carefully before making a decision. Home equity loans which are used for education have many tax benefits.

My Mom Used To Say ‘Prevention Is Better Than Cure’

Because many Americans don’t have health insurance, using equity loans in the event of an illness or injury is a great way to avoid debt. It has become much more difficult for people to file bankruptcy, and because of this it will not be easy to get out of a situation in which you have an unexpected illness. An equity loan could protect you in a situation where you have high medical bills with no health insurance. As the cost of healthcare continues to increase, having a equity loan or line of credit can greatly help you.