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Take out home equity to invest in your business idea

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Launching your own business is an exciting endeavor, whether it’s opening a restaurant or making your side hustle into a full-time gig.

In order to make money, however, you need money. The average cost to start a business can range from $12,000 to $375,000, depending on which industry you’re in. From material and equipment costs to space rental and wages, making your business dreams a reality can take some serious cash.

While taking out a business loan can be an option to fund your idea, these kinds of loans often come with requirements for a business credit history or have high interest rates. If you’re starting from the ground up, it can be difficult to secure funds to get your business idea off the ground.

If you own your home, your equity can serve as the seed fund for your business. Refinances, equity loans and equity sharing agreements like Unlock can help free cash from your home and kickstart your business dream. Here’s how to make it happen.

Options for funding your business with home equity

Using the ownership in your home to start your business has multiple benefits, making it a viable option to use as a seed fund. As such, there are several ways to cash out on your home equity.

First is a cash-out refinance, where you replace your current mortgage with a larger one in exchange for cash out from your equity. Here, your monthly payment grows to accommodate the larger loan and you get a new interest rate. A home equity loan, on the other hand, adds another loan on top of your mortgage, giving you a lump sum from your equity. A home equity line of credit (HELOC) works similarly, only the cash you withdraw can be done on a flexible basis, similar to a credit card. Both require an additional monthly payment on top of your regular mortgage.

The fourth option is an equity sharing agreement. In this case, the agreement company buys out a share of your equity in exchange for a portion of your equity in the future, to be paid when the agreement expires or when you sell the house. This requires no monthly payments or interest, and the equity is disbursed in a lump sum.

These cash-out methods have advantages over taking out a business loan or grant, such as not requiring a business credit score. While an equity cash-out does require a credit score and minimum equity amount, they have generally lower requirements than a standard business loan. If you’re starting your business anew, you can access cash immediately. As well, you can get a better interest rate than other loan types — or, in the case of home equity sharing agreements, no interest at all.

How to fund your business with home equity

Cashing in on your equity to start your business takes some planning. While the requirements can be less stringent than taking out a business loan, approaching it with a clear idea of the impact and repayment will set your business finances up for success.

1. Make a plan for your business

While you technically aren’t required to provide a business plan to cash out your equity, it’s still a good idea to outline how you’ll build your business, what your target audience is, what your overhead will be and how you plan to profit. This will help inform how much money you need and when you’ll be able to pay it back.

2. Research options and providers

Consider each equity cash-out method when deciding how you’ll fund your business. The pros and cons of using home equity to start a business vary; for example, a HELOC can provide a more flexible cash flow than a lump sum from a refinance or an equity loan. The interest rate you’ll get will majorly impact how much you’ll end up paying back, so shop around. With a home equity sharing agreement, you don’t have to pay interest; instead, you pay the provider a percentage of your equity when you sell the house or buy back the agreement, so make sure to do the math.

3. Check your requirements

All equity cash-outs come with equity and credit score minimums. In general, you’ll want to have at least 20 percent equity in your home before you can cash out. Credit score and income requirements vary, but will generally be around the mid-600s for home equity loans, refinances and HELOCs. Equity sharing agreements like Unlock generally come with lower credit score requirements and skip the income minimum entirely.

4. Figure out how you’ll repay

Paying back your loan is an integral part of your business and long-term financial plans and one of the challenges of starting a small business. Depending on which method you choose, you may have to make payments on your loan straight away — which can be an issue if you don’t immediately turn a profit. Make sure to have a way to make the monthly payment when you have a slow month. With a home equity agreement, since the payment is provided upon sale of the house or at the end of the agreement, you don’t have to make a monthly payment.

5. Gather the necessary documents

Depending on which method you select, you’ll need to provide your servicer with documentation relating to your credit score, homeownership and taxes. Some banks will allow you to apply online — Unlock, for example, has a fully digital application and approval process.

6. Apply and wait

Once you’re ready, go ahead and apply. Your servicer may pre-qualify you for a certain amount, giving you a benchmark of how much cash you’ll receive. You’ll also have to undergo a house appraisal to determine how much the house is worth, alongside other possible application requirements. Depending on the method, it can take you anywhere from a couple of weeks to a couple of months to get your money. A cash-out refinance, for example, can take up to 60 days, while an equity sharing agreement like Unlock can take as few as 10 days.

Freeing equity for your business with Unlock

When it comes to using home equity to start a business, Unlock offers a way to access the cash in your house with no monthly payments, no interest and the freedom to run your startup. An equity sharing agreement can offer between $30,000 and $500,000 in cash, depending on your house’s value.

Unlock works by purchasing a share of your home’s equity in exchange for a larger portion in the future. For example, if you receive 10 percent of your home’s value in cash from Unlock, you’ll owe 16 percent of the future value, either when the agreement ends or when you sell the house. Unlock profits from the increase in equity from your house’s value growing, while factoring out any changes in its value from home improvements.

This method comes with multiple advantages for a business owner. Since the buyback share is based on the home’s equity, you don’t have to worry about locking in a good interest rate or dealing with increases from an adjustable rate.

You also get flexibility over when and how you pay. Unlock’s agreements typically last 10 years, but you can buy back your share at any time in a way that works for you — whether it’s in increments, a lump sum or as a portion from your house’s sale. If your business is taking time to get off the ground, or a life event like a new baby occurs, you don’t have to worry about making the monthly payment. When the money starts rolling in, you can buy back your share before the agreement is up.

Plus, Unlock doesn’t require income verification or a business credit score. If you’re quitting your job to jump-start a brand-new idea, then equity sharing can give you a springboard with a lower bar to entry.

If you’re looking to get your business off the ground and have at least 20 percent equity in your home and a credit score of at least 500, then Unlock might be an option for you to consider.

The bottom line

A new business comes with its ups and downs. While finances will be one of the key challenges as you get your startup going, cashing out your equity can get you off on the right foot. Leveraging your home can be a more accessible, lower-interest seed fund than conventional loans or going into credit card debt, funding your startup easier than ever.

Unlock can offer all the best parts of cashing in on your equity while skipping the interest, monthly payments and requirements of more traditional methods. If you have a business idea that’s been taking up headspace, don’t wait on it — check your home’s equity and start making your business dreams come true.

Written by
Marlese Lessing
Sponsored Content Writer
Marlese Lessing is a sponsored content writer for Bankrate, and helps bridge the right products and services to the right audience.
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Editor, Branded Content