Pros/Cons of 10 year HELOC @ 7.75% vs. 10 year SBA @ 11.5%
May 28, 2024
by a searcher from Columbia University - Columbia Business School in Leesburg, VA, USA
Share your thoughts on pros/cons of a self funded searcher doing a 10 year SBA loan redacted w personal guarantee vs. doing a bigger equity infusion that is funded via a 10 year HELOC redacted on personal residence. The house is collateral either way in the purchase of the business via the personal guarantee on SBA or via the HELOC. Is risk profile quite similar or am I missing something? If the former, then what are some additional considerations here on top of the math exercise of personal HELOC interest expense deductibility vs. SBA interest tax deductibility and the downstream impacts on cashflow and company valuation?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
1) If you have less than 25% equity in your home with the home equity loan in place, even if it is not fully drawn, a lender is not required to take your home as additional collateral on the loan. Having the equity available to you would provide you another source of working capital, whether you use it in the deal or not, which also helps strengthen the deal.
2) With the new SBA rules you can now use a home equity loan as your down payment so long as when the payment is factored into your personal debt service there is cash flow from the business to support a high enough salary or other personal sources to support the payment on the home equity loan.
3) Putting more money down at a much lower interest rate with a home equity loan will definitely decrease your overall interest expense on the transaction. Just keep in mind that post closing it may be hard to go get additional debt on the business if you need additional cash, and you may now have just depleted a potential source of future liquidity should anything arise with the business.
4) I do not believe the home equity interest is "deductible" from your taxes personally. However, and I am not an accountant so I would engage one on this, but I do believe you can put your equity into the company or a portion of it as a loan from shareholder and in doing this you could pay yourself interest on that loan over time. Although the Bank requires the funds to be "equity" at closing, many accountants when they file the tax returns will put some or all of it down as a shareholder loan versus equity when they do the taxes. This may be an option to in essence have the company pay the interest. Again, i would consult with an accountant about this option.
Happy to discuss creative ways to make a deal work. You can reach me at any time at redacted or via email. Good luck with your decision.
from INSEAD in Seattle, WA, USA
Besides the tax deduction, if you can get it approved, it is not a bad idea to get approved for HELOC so you have available credit before circumstance changes.
HELOC requirement got more stringent over the years: you must be W2 or if self-employed, need 2 years of income statement.
Bottom line- if you're considering to become fulltime searcher and still employed, go get HELOC approved before leaving your job.