Say hello to HELOC: a home equity line of credit is an option for funding start-up costs for your business.

Small business owners need more than passion and a great concept to generate the financing to launch a company. Most lenders require a solid business history and business assets to approve a loan. Because of this, new business owners often use personal savings or credit cards to fund start-up costs. A better option, though, enables entrepreneurs to use their home as collateral while building a credit history in the company's name.

A business home equity line of credit (called HELOC) transfers the payment history on this type of equity loan to the business's credit rating. Eventually, a positive payment history on the line of credit will permit the business owner to build sufficient credit to obtain traditional commercial financing, without including personal collateral, to fund future growth.

Setting terms for a credit line

A business HELOC functions as any other home-secured credit line. Accessing the equity in a home, a borrower can establish terms that make the most sense for him or her. Factors to consider in setting up the credit line include the requested lump sum cash access, the payback period and the most favorable interest rate scenario.

Banks lend homeowners a percentage of the equity available, typically up to 80 percent. Additionally, the lender may adjust fees or interest rates based on the homeowner's personal credit score or use of other banking services such as checking or deposit accounts.

Funds available when needed

Business owners can easily access cash in an equity line of credit, either by writing a check or electronically transferring funds. In general, interest rates are variable and the interest is deductible as a business expense.

Borrowers need to remember, however, they are using personal property as collateral. As with any line of credit, the collateral can be used by the bank to guarantee payments are made. If the borrower sells the home, the lender requires full payment of any outstanding credit and closes the line. However, if the term expires while an amount is outstanding, the borrower may be able to extend the line.

Easy homework

Before applying for the equity line of credit, borrowers must have information about the loan-to-value ratio on their personal property. The usual personal documentation required for traditional financing will also be necessary, such as tax returns and a listing of all other financial obligations. As with any type of loan, the bank is most interested in seeing the specific sources of income that will be used to make the payments.

Even if the general line of credit process is streamlined and can be done via a Web portal, entrepreneurs should establish personal relationships with their business banker. A business banker can offer advice and information of additional services available to business customers, help an entrepreneur weigh the merits of a business HELOC and ensure that the HELOC is established in a manner that builds the company's payment history. Most importantly, a business banker will evaluate when the business is able to stand on its own credit history for commercial loans.

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RELATED ARTICLE: Score with SCORE!

The Small Business Assistance Center at the Detroit Regional Chamber is partnering with the Service Corps of Retired Executives (SCORE) to offer FREE, one-on-one counseling sessions to small business owners and entrepreneurs. Sessions will be offered on April 12 and 19, May 10 and 17, and June 14 and 21 at Chamber headquarters. For more information or to schedule an appointment, call the Small Business Assistance Center SCORE counselors at [phone] or e-mail questions to: [e-mail].

Larry Nichols is the business banking vice president for Huntington Bank in Eastern Michigan, a Gold-level member of the Detroit Regional Chamber.