New business ventures require financing, and one basic rule of running a business is to be open-minded about considering all possible sources of capital. Only then can the entrepreneur make a sound business decision based on the cost, availability, and timeliness of capital. 

While it is natural to think of a Small Business Administration (SBA) loan as a source of start-up capital, it is also worth considering the pros and cons of using a home equity loan instead. At the very least, home equity loan quotes should be reviewed alongside SBA loan rates before a decision is made.

Limitations on SBA Loans

Critics have charged that the SBA has become overwhelmed in recent years due to cuts in budgets and staffing. This could affect the timing of some loans, and of course timing can be a critical factor in any business plan.

Also, the SBA itself doesn't make loans. Rather it works as a clearinghouse for information on small business lenders and as a guarantor of certain loans. This essentially puts the applicant in the same boat as a home equity borrower. In fact, in some ways SBA loans may have the following disadvantages when compared to home equity loans:

• Cost. Home equity loan rates are often cheaper than commercial loan rates, especially those offered to start-up businesses.
• Availability. A brand-new business may have a hard time obtaining an SBA loan due to requirements for financial statements and collateral.

Considerations in Using Home Equity

In short, cost and availability are two factors in favor of using home equity to finance a business venture. However, there are other factors an entrepreneur should consider when evaluating a home equity loan for this purpose:

• Budgeting. Besides having the home equity available as collateral, the entrepreneur needs to make sure that cash flow will be regular enough to make the loan payments.
• Risk. Obviously, putting the family home up as collateral raises the stakes.
• Cost. It's important to compare multiple home equity loan quotes, since not all lenders offer the same rate.

No source of financing comes without strings attached. In evaluating which type of financing makes sense for a new venture, an entrepreneur would do well to consider all the options, including home equity. 

Sources:

BusinessWeek

Small Business Administration