Personal HELOCs

• Sole proprietors who run their business under their own Social Security number can use HELOCs as business loans because from a tax perspective the individual and the business are one and the same. People who own other types of businesses can also use personal HELOCs for business purposes because there are no prohibitions against business owners using personal funds or personal loans for business purposes. Many people prefer to take out a personal loan as opposed to a business HELOC because rates for personal loans are typically lower.
  
  

Tax Considerations

• The Internal Revenue Service tax code allows people in certain tax brackets to deduct some of the interest that they pay on home equity lines from their taxable income. Tax deductions are more complicated on a business HELOC because if the business entity pays the tax, the homeowner cannot deduct the interest from personal income. If a homeowner takes out a loan in his personal name but uses it for business purposes, he is sometimes able to have the business entity pay him interest payments, which he receives as personal income, and then deduct the interest payments he makes to the mortgage company. Business owners should always consult certified tax professionals to determine their own tax liability.
  
  

Business Equity Lines

• Generally, business equity lines work exactly the same way as personal lines and begin with a revolving credit period in which the business can draw on the line followed by a 10- or 15-year repayment period. Some business owners prefer to take out a business line rather than a HELOC because it simplifies the tax situation as well as day-to-day accounting. However, banks normally require all business owners with more than a 20 percent stake in a company to sign as loan guarantors on all types of business loans. Banks do not generally allow people without a controlling interest in a property to sign on a loan against it as either a borrower or guarantor; therefore, business equity lines are not common in businesses with multiple owners.
  
  

Other Considerations

• HELOCs, like all mortgages, are tied to residential property, and, if the borrower defaults, the lender can seize the property. Many homeowners are reluctant to risk their home as collateral for a business loan. Additionally, if a business runs into financial problems, creditors may attempt to have the homeowner use cash from a HELOC designated as a business purpose loan to settle the business debts. However, lending options are sparse for startup businesses so HELOCs and business lines of credit are the only option for many business owners.