Home equity line of credit HELOC

A HELOC is a consumer mortgage product: a revolving line drawn against the equity in a home, with a draw period followed by a repayment period, usually at a variable rate tied to prime. Nothing about it is business finance. It becomes business finance the moment an owner draws on it to fund payroll or inventory.

Why owners use it

Pricing. A secured consumer line priced off prime is materially cheaper than unsecured business working capital, and the underwriting looks at the house and the owner's personal income rather than at business performance — which is exactly why it is available to businesses that cannot get commercial credit.

What changes when you use it for the business

• The collateral is where you live. Business failure and housing risk become one risk
• Consumer protections attach to the loan itself, but a lender that learns the proceeds are for business purposes may treat the loan differently at origination; business-purpose loans are exempt from several consumer lending rules
• Draw periods end. When a line converts to amortising repayment the payment can rise sharply, often at the worst time
• Lenders can freeze or reduce a HELOC when property values fall or the borrower's credit deteriorates, and most agreements permit it

In SBA files

Home equity is a common source of the equity injection in an SBA acquisition. Whether borrowed funds count as injection depends on the programme rules and the lender: injection sourced from debt is generally scrutinised, and may need to be on full standby or demonstrably repayable from income unrelated to the business. Requirements change and differ by lender.