Over the last 15 years of my career a common trait of many of my successful business clients is home ownership. The home can be a valuable tool for growing a business. During the growth cycle a business is pressed with looming issues of needing some credit to reach the next level of business.
The majority of small businesses begin with a limited amount of fixed assets and have concentrated receivables (client list). The bank is looking for hard assets as security to extend a significant amount of money to a person. The most a client can receive unsecured is typically only 10% of their yearly gross salary. The gross salary theory is a challenge to many entrepreneurs because their income fluctuates so much.
The next best option is home equity as collateral. The equity can be used in several ways and a creative banker can assist the owner to meet their goals. My encouragement to business owners is budget to become homeowners as quick as possible, especially if you own a company in the service industry. The service industry typically has the least amount of hard collateral for lending
What’s the mathematics Jeff?
Many banks can lend up to 90% of the value of the home.
Home Equity Equation: Home Value x 90% (LTV) - First Mortgage Debt = Equity
Home Value: $300,000
Loan to Value : 90%
First Mortgage Debt: $180,000
Equity = $90,000