Quick primer

Using your home as collateral to fund business activity is common because home-secured loans typically carry lower rates than unsecured business financing. That lower cost is tempting, but it comes with a fundamental trade‑off: your home becomes the lender’s primary remedy if you cannot repay. This article explains how home‑equity financing works for businesses, tax and legal considerations (including post‑TCJA limits), practical risk controls, alternatives, and a step‑by‑step checklist I use with clients.

How home‑equity options work for business funding

  • Home equity loan: A fixed‑rate, one‑time loan secured by a second mortgage. Predictable payments make budgeting easier.
  • HELOC (home equity line of credit): A revolving credit line secured by your home; typically variable rate and flexible for staged expenses.
  • Cash‑out refinance: Replace your first mortgage with a larger mortgage and take the difference in cash; can be a way to lock a lower fixed rate for a large, one‑time need.

In my 15 years advising borrowers, I’ve seen entrepreneurs who used a HELOC for phased startup expenses benefit from flexibility—but also others who stretched draw periods into repayment shocks when rates reset.

Authoritative context: the Consumer Financial Protection Bureau explains HELOC features, variable‑rate risks, and borrower protections (see consumerfinance.gov). The IRS has specific rules about mortgage interest deductibility that affect tax treatment (see https://www.irs.gov/taxtopics/tc505).

Key risks to understand

  1. Personal collateral risk: Because the loan is secured by your primary residence, business failure can lead to foreclosure if you default. This is the single largest practical risk.
  2. Interest‑rate risk: HELOCs usually have variable rates; interest costs can rise sharply when indexes move higher. CFPB warns borrowers to expect rate variability on HELOCs.
  3. Overleveraging your home: Using a large share of available equity leaves little runway if home values fall or income drops.
  4. Subordination and refinancing limits: A second mortgage or HELOC sits behind your first mortgage. Refinancing the first mortgage may require subordination or payoff of the second lien—see our article on how loan subordination affects second mortgages and HELOCs for details (internal link below).
  5. Tax complexity: Since the 2018 Tax Cuts and Jobs Act (TCJA), interest on home equity debt is deductible only when the proceeds are used to buy, build, or substantially improve the home that secures the loan. Using home equity for business usually eliminates the mortgage interest deduction under that rule; however, interest used for business may be deductible as a business expense under different tax rules if properly documented—consult a CPA (IRS guidance on mortgage interest deduction).

Tax and accounting considerations (practical guidance)

  • Mortgage interest rules: The TCJA suspended the miscellaneous deduction for home equity interest unless the funds are used to improve the secured property. For most business uses, mortgage interest will not qualify as deductible mortgage interest on Schedule A (see IRS mortgage interest guidance).
  • Business expense treatment: If you are self‑employed and you can document that the borrowed funds were used strictly for business, interest could be deductible as a business expense on Schedule C or against business income, subject to business interest limitation rules (IRC §163(j)). Keep contemporaneous records showing money flow from the loan to the business bank account and a clear chain of invoices or use of funds.
  • Entity structure: If your business is an S corp, LLC, or C corp, ensure loans are documented properly (e.g., owner loan vs. capital contribution). Mixing personal‑secured loans and corporate bookkeeping without documentation risks disallowance and tax complications.
  • State law: Some states have homestead or creditor protections that affect foreclosure risk and garnishment—check local rules and consult an attorney.

Cite authorities: IRS mortgage interest rules (https://www.irs.gov/taxtopics/tc505), CFPB guidance on HELOCs (https://www.consumerfinance.gov), and SBA resources for small‑business lending alternatives (https://www.sba.gov).

Practical due‑diligence checklist before borrowing

  1. Confirm available equity with a realistic home valuation and outstanding mortgage balance. Example calculation: home value $400,000 minus mortgage balance $200,000 = $200,000 equity. If your lender allows combined LTV up to 80%, available borrow = 0.80*400,000 − 200,000 = $120,000.
  2. Compare effective rates: get quotes for a HELOC, home equity loan, cash‑out refinance, and a business loan (SBA 7(a), term loan, or line of credit). Factor in closing costs, annual fees, and rate type.
  3. Run worst‑case cash‑flow scenarios: test ability to pay if business revenue is 50% of projections and if HELOC rate rises 300 basis points.
  4. Document intended use: keep receipts, contracts, bank records showing funds directed to business expenses to support any future tax or audit questions.
  5. Talk to a tax pro and an attorney: confirm potential deductibility and review loan documents for cross‑default or acceleration clauses.
  6. Consider an exit plan: prepare how you’ll repay the home‑equity debt if the business stalls—personal savings, sale, refinancing to longer term, or converting debt into investor equity.

Borrower protections and loan terms to negotiate

  • Fixed rate vs. variable rate options: lock larger sums into a fixed‑rate home equity loan or cash‑out refinance if you need predictable payments.
  • Interest‑only draw periods: avoid long interest‑only periods that later balloon into principal+interest payments you can’t afford.
  • Prepayment penalties and fees: minimize or avoid prepayment penalties and annual HELOC fees.
  • Draw period and repayment period comparability: ensure the repayment schedule matches the business timeline.

When to choose alternatives instead

  • If you need working capital rather than a one‑time lump sum, a business line of credit or merchant financing may be safer.
  • If you qualify, an SBA 7(a) loan or CDC/504 loan often provides business‑focused terms and doesn’t tie personal real estate directly to business cash flow in the same way (see our SBA Loans 101 guide linked below).
  • For small, short‑term needs, consider a business credit card or a small‑dollar microloan from a community lender (CDFI) to avoid risking your home.

Real‑world examples and outcomes

  • Positive: An owner used a $50,000 HELOC to fund a targeted marketing campaign and hire one key salesperson. Within 18 months, the additional sales covered the HELOC costs plus profit, and the HELOC was paid off. Success factors: conservative draw, clear ROI milestones, and contingency savings.
  • Negative: Another client used an 80% LTV cash‑out refinance to cover ongoing operating losses. When revenue fell, the homeowner could not keep up with new mortgage payments and eventually sold the home under distress. Lessons: avoid using home equity to repeatedly cover operating shortfalls.

Documentation and bank relationship tips

  • Keep business funds separate: transfer home‑equity proceeds directly to a business account and label line items in accounting software.
  • Record the business purpose immediately: invoices, contracts for equipment, lease agreements, or payroll records help substantiate business use.
  • Maintain a lender relationship: shorter draws and clear repayment performance can preserve future borrowing options and avoid default triggers.

Next steps and decision framework (summary)

  1. Confirm how much equity you really have and how much you should use (keep a cushion for home‑value declines). 2. Compare rates and net cost across a HELOC, home‑equity loan, cash‑out refinance, and business lending. 3. Prepare a worst‑case cash‑flow model and an exit plan. 4. Document every dollar used for business and consult a CPA and attorney before closing. 5. Prioritize alternatives (SBA loans, microloans, investor capital) if the risk of losing your home is unacceptable.

Internal resources and further reading

Final takeaways

Using home equity for business financing can be a cost‑effective tool, but it converts a personal asset into business collateral. Treat it like any high‑stakes financing decision: quantify downside risk, document use, secure professional tax and legal advice, and compare alternatives. In my practice, borrowers who succeed treat home equity as one part of a diversified funding plan—not the only lifeline.

Professional disclaimer: This content is educational and not individualized legal, tax, or investment advice. Consult a CPA and an attorney for guidance that considers your full financial picture and the latest tax law (IRS, CFPB, SBA resources cited above).