According to the U.S. Small Business Administration, new businesses are being formed at a rate of over 600,000 per year. If you have the entrepreneurial urge to join the ranks of small business owners, an important part of your business plan should be your method of financing and repayment.

One source of capital is home equity, which may be your largest single asset. You can access home equity either by taking out a second mortgage or refinancing your existing mortgage for more than your remaining balance.

Methods of Financing

Your first step in financing might be to find out what special programs and incentives are available from the government. The U.S. Small Business Administration is a good source of information on the federal level, and you should also check out your state and local government.

Even with some assistance, assume that you'll need to borrow at least some of the necessary capital. The following are some options to do that using home equity as collateral.

Refinance vs. Second Mortgage

Naturally, a second mortgage is one option, assuming you have accumulated a sufficient amount of home equity. Alternatively, you may be able to refinance your existing mortgage, borrowing an amount greater than your remaining balance to tap into some of that home equity.

The choice between whether to refinance or take out a second mortgage largely comes down to whether interest rates have fallen since you originated your current mortgage. If they have, then you may be able to refinance, free up some home equity, and get yourself a better interest rate into the bargain.>

On the other hand, if interest rates have risen, you won't want to refinance that lower-rate loan. It would make more sense to take out a second mortgage, so you only pay the higher rate on the new amount of borrowing.

Risks of Using a Mortgage

Of course, whether you refinance an existing mortgage or take out a second mortgage, you are using your home as collateral. This means that if you default on the loan, you risk losing your home. Many entrepreneurs understand that this is the type of conviction required to launch a new venture, but you should think it through carefully. Make sure you have the level of conviction to justify the risk--and that your business plan is as well thought out as it can be.

Advantages of Using a Mortgage

Using a mortgage does offer some advantages in return for the risk of foreclosure. Since it is a secured loan, you are likely to find approval easier to get than for a conventional loan, and the interest rate can be significantly lower. In the early years of a business, when cash flows are tight and profit margins are low, that lower interest rate might make all the difference.

Speaking of cash flow, this is the key to survival for a new business. You may be able to borrow against home equity by refinancing or taking out a second mortgage, but you'll then need liquidity to repay the loan. Starting out with a cash cushion, and having a plan to achieve at least a maintenance level of cash flow quickly, should be important features of your business plan.

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