Currently, interest rates are at relatively low levels and with the current credit crunch upon us it is difficult for business owners to obtain business loans to expand, purchase equipment, or to consolidate business debt.
An alternative is for business owners to either refinance their existing personal residence mortgage or try to obtain a home equity line of credit.
A smart move before the business owner applies for a mortgage or heloc would be to meet with their accountant to identify their needs and focus on the following factors:
- What is the money to be used for
- Will it result in additional cash flow
- When is the money needed
- Evaluation of loan type - Traditional or FHA
- Evaluation of loan maturity
- Tax Impact
- Cost benefit analysis
In some cases, a business may need a new truck for example and wants to increase the owners personal cash flow by refinancing to obtain a better rate. The new mortgage principal may result in a larger loan, because of the truck purchase, but the payments are the same due to the lower interest rate.
The question in this case is did it make sense to increase the length and principle of the mortgage to purchase a truck which may only have a five year life while incurring additional closing cost.
The financing may be the last resort for much needed expansion or improvement purposes to keep the business alive but the business owner does not need all the money at once. In this case would it make sense to refinance and have the money sitting idle until needed? No, a home equity line of credit would make more sense because the business owner can draw on it when needed.
There are many scenarios that can take place. The basic premises is that the business owners must evaluate the situation, and seek assistance from an independent third party that is not emotionally attached.
Many banks and mortgage companies will tell you what you want to hear just to make the loan and of course to make money.
Thus it is important to bring in some expertise such as your accountant who has had more dealings in financing arrangements and also knows your business and personal financial status.
The current economy makes it more challenging when going to refinance, but planning ahead will not only help business owners make the correct decision, but help them get a better deal as well.