HELOC for Business
Bills Bottom Line
A business equity line of credit could give you access to lower-cost capital when business loans aren’t an option. But your home is the collateral—which means the stakes are personal, not just financial. Learn how it works, what it costs, and when the risk may not be worth it.
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You have equity in your home and a business that needs capital. Maybe an SBA loan moved too slowly or your business is too new to qualify for a credit line on its own. Whatever the reason, the equity in your home is starting to look like a viable option.
A business equity line of credit, commonly called a business HELOC, is a revolving line of credit secured by your home. If approved, you get a maximum credit limit, then you can borrow, repay, and borrow again up to that limit throughout the draw period. Interest accrues only on what you use.
A HELOC can be a practical tool. It can also put your home at risk if the business struggles. Learn how HELOCs work, and when the risk outweighs the potential benefit.
How a business equity line of credit works
Most HELOCs work the same way regardless of how you use the funds. You apply as an individual homeowner, and your home secures the credit line. Some lenders offer a business HELOC in your entity’s name. Even then, your personal residence commonly serves as collateral. The distinction matters for taxes, which the tax section covers below.
The draw period typically lasts up to 10 years. During this time, you can borrow up to your credit limit, make payments as required, and borrow again as needed up to your credit limit. Many lenders allow interest-only payments during this phase, though terms vary. Once the draw period ends, the repayment period begins, typically spanning 10 to 20 years, and you pay both principal and interest.
How much you can borrow depends on your equity, which is your home’s value minus your existing mortgage balance. Most lenders allow total borrowing up to 80% to 85% of your home’s value, though this varies by lender.
HELOCs usually carry variable interest rates, meaning your rate and payment could shift as market rates move. Some lenders offer fixed-rate options. Approval is subject to credit review, and your actual rate depends on your credit profile and the lender’s terms.
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| How funds disbursed | Draw as needed (revolving) | Lump sum at closing |
| Rate type | Usually variable | Usually fixed |
| Draw period | Typically up to 10 years | None full disbursement at close |
| Repayment period | Typically 10 to 20 years | 10 to 30 years |
| Best for | Ongoing or uncertain needs; short-term cash flow gaps | Known, one-time needs; predictable payment preferred |
What you could use a business HELOC for
HELOC funds can go toward equipment, inventory, marketing, payroll during a slow stretch, or a space upgrade. For short-term costs the business can pay back relatively quickly, a HELOC could make sense.
Assess your risk with both eyes open before borrowing. Roughly half of small businesses don’t survive their first five years, according to Bureau of Labor Statistics data. That’s not a reason to stop—but it is a reason to take the collateral question seriously before you draw.
The backup plan question is this: If revenue falls short next month, what covers the HELOC payment? A working spouse’s income, savings, or liquid investments all count. If the only answer is “the business will take care of it,” that may not be enough.
Pros and cons of using a HELOC for business
There's no universal right answer here. The same features that make a HELOC useful can also make it dangerous.
Pros:
- HELOCs generally offer lower interest rates than unsecured business loans or credit cards, because the loan is secured by your home.
- You only pay interest on the funds you use. Note that many lenders have a minimum initial draw requirement.
- Because a HELOC is secured by your home rather than your business, it may be easier and faster to get than a traditional business loan, particularly if you’re just starting out.
- Where lenders offer interest-only payments during the draw period, early monthly costs stay lower.
Cons:
- Your home secures the loan. If you fall behind on payments, the lender could foreclose.
- If you pay only interest during the draw period, you could see a sharp payment jump when the repayment period starts.
- Variable rates could increase over time, raising payments unpredictably.
- Mixing personal and business funds can complicate accounting and taxes.
- Your credit limit is capped by your home equity, not your business potential.
Tax treatment: what business owners need to know
One question that comes up often: Can you deduct HELOC interest if you use the funds for your business? The answer depends on which type of deduction you’re asking about—and most sources only cover one of the two.
Not deductible as home mortgage interest
HELOC interest is only deductible as home mortgage interest when funds are used to “buy, build, or substantially improve” the home securing the loan. Using HELOC funds for business expenses doesn’t meet that test, so the home mortgage interest deduction doesn’t apply.
May be deductible as a business expense
That doesn’t mean the interest is never deductible. Under the tracing rules of Treasury Regulation 1.163-8T, interest deductibility follows the use of funds, not the collateral. If HELOC proceeds go toward legitimate business expenses, the interest may qualify as a deductible business expense.
The rules are complex and situation-specific. Consult a tax advisor before claiming any deduction.
Alternatives to a business HELOC
A HELOC may not be your only option. Consider these potential alternatives:.
- Home equity loan. Similar to a HELOC in that it’s secured by your home, but you receive a lump sum instead of a credit line at closing, typically at a fixed rate. That predictability could work better if you know exactly how much you need and want a steady payment.
- Business line of credit. Revolving credit tied to your business, not your personal assets. Keeps your home out of it entirely. Business lines of credit often require at least one to two years of operating history, though requirements vary by lender.
- SBA loans. The process is longer, but SBA loans typically don’t require your home as collateral. Collateral requirements vary by loan type and amount.
- Business credit cards. Many offer 0% APR introductory periods for short-term expenses. They also help build business credit. Best when the balance can be paid in full.
- Personal loans. Unsecured, so no collateral risk, but interest rates are typically higher than a HELOC.
Still weighing whether a HELOC fits? How a HELOC works is a good place to start.
Bills Action Plan
- Calculate your available equity: apply your lender's maximum CLTV (often .8 or .85) to your home’s estimated value, then subtract the total of all existing loans against your home, to see roughly what you could access.
- Run a backup plan stress test before applying: confirm you could cover HELOC payments from another income source if business revenue falls short.
- Consult a tax advisor about whether HELOC interest could be deductible as a business expense in your situation, then compare at least three lenders before applying.
Key Terms
HELOC (home equity line of credit): A revolving line of credit secured by your home’s equity. You borrow, repay, and borrow again during the draw period.
Draw period: The phase of a HELOC, typically up to 10 years, during which you can borrow funds. Many lenders allow interest-only payments during this phase, though terms vary.
Repayment period: The phase after the draw period, typically 10 to 20 years, during which you repay both principal and interest.
LTV (loan-to-value ratio): Your total mortgage debt divided by your home’s current value. Lenders use LTV to determine how much you can borrow.
CLTV (combined loan-to-value ratio): All loans secured by your home, including your mortgage and HELOC, divided by your home’s current value.
Variable rate: An interest rate tied to a market benchmark. Most HELOCs carry variable rates, so your monthly payment could go up or down.
Home equity: The difference between what your home is worth and what you owe on your mortgage.
Can I use a HELOC for business purposes?
Yes. HELOC funds can generally be used for any purpose, including business expenses, unless your loan agreement specifically prohibits it. The financial risk is significant: your home secures the loan, and if you can’t keep up with payments, the lender could foreclose. Using a HELOC for a new or unproven business carries more risk than using it for one with consistent revenue. A repayment plan backed by income beyond the business itself is worth treating as a prerequisite, not an afterthought.
Can an LLC take out a HELOC?
Some lenders offer business HELOCs in an entity’s name, including LLCs, but your personal home is typically still used as collateral even when the line is in the business’s name. Most standard HELOCs are applied for by an individual homeowner, not the business. If separating personal and business finances is a priority, a business HELOC through a lender that offers this product may be worth exploring. Talk to your lender about what’s available and the qualification requirements.
Is HELOC interest tax deductible if used for business?
HELOC interest used for business is not deductible as home mortgage interest under current tax law. The IRS requires that funds be used to “buy, build, or substantially improve” the home securing the loan for that deduction to apply. If HELOC funds are used for legitimate business expenses, the interest may be deductible as a business expense under the tracing rules of Treasury Reg. 1.163-8T. The rules are complex and situation-specific. Consult a tax advisor before claiming any deduction.
How do I qualify for a business HELOC?
Qualifying for a HELOC is similar to qualifying for a mortgage. Lenders typically review:
Credit score: Lenders tend to prefer a score of at least 600
Debt-to-income ratio: Most lenders prefer at or below 43%
Home equity: Lenders generally cap borrowing at 80% to 85% of your home’s value, minus any existing mortgage balance.
Requirements and loan terms may vary significantly by lender. Prequalify with at least three lenders to get quotes before you choose a loan. Prequalifying with a soft credit check won’t impact your credit score.