A Home Equity Line of Credit (HELOC) is a flexible financing tool that allows homeowners to borrow against the equity they have built in their property. While HELOCs are traditionally used for personal needs such as home renovations or major purchases, many small business owners also leverage them to fund business-related expenses.
When used responsibly, a HELOC can provide convenient access to capital, competitive interest rates, and flexible repayment terms. Because the credit line is secured by home equity, borrowers may qualify for lower interest rates compared to unsecured personal loans or business credit cards. For entrepreneurs who need funding but may not qualify for traditional business loans, a HELOC can be a practical alternative.
United Capital Source helps business owners understand how different financing options work, including HELOCs for business use, and connects qualified applicants with lenders offering competitive terms.
A home equity line of credit, or HELOC, is a revolving credit line that’s secured by the equity you’ve built in your home. With a HELOC, you can borrow against a portion of your total equity. A HELOC is similar to a credit card because you can withdraw funds up to your limit, repay what you borrow, and then re-access funds during the borrowing period.
Homeowners commonly use a home equity line of credit for personal expenses and large purchases. A HELOC can be used for home improvements that increase your home’s value or to fund major expenses such as education costs. This can include purchasing home improvement tools, hiring a contractor, or paying for college tuition. The interest paid on a HELOC may be tax-deductible, but you should consult a tax advisor to understand how interest deductibility applies based on individual circumstances.
Some lenders allow small business owners to use HELOC funds for business purposes, effectively turning a personal equity line of credit into a flexible source of business capital. Business owners may use a HELOC to borrow funds for startup costs, working capital, debt consolidation, or unexpected expenses. Because the loan is credit secured by home equity rather than business assets, credit approval may be easier for qualified homeowners.
The interest rate on a HELOC is often lower than other forms of credit, such as personal loans or credit cards, making it appealing for significant expenses and major purchases. HELOC rates in early 2025 averaged 8.1%-8.36%, much lower than the average credit card rate, which exceeded 23%.
Small business owners have a 44% approval rate for HELOCs, compared with 38% for bank business loans.
Source: Bankrate
Approximately 5% of small business owners use HELOC funds for startup financing.
Source: Federal Reserve’s Small Business Credit Survey
Most lenders allow you to borrow up to 85% of your home value, but some go up to 90% or even 100%.
Source: The Mortgage Reports
A HELOC allows homeowners to access a revolving credit line based on the equity in their home. Borrowers can access 80-85% of their home’s appraised value, minus the existing mortgage balance, through a HELOC. Your home’s equity is the difference between your home’s appraised value and your current mortgage balance.
Typically, lenders allow you to borrow a total combined amount of 75 to 90% of your home’s value. The approved credit limit is determined by factors such as credit history, loan-to-value (LTV) ratio, income, and outstanding mortgage balance.
A HELOC typically has two distinct phases: a Draw Period and a Repayment Period. During the draw period, borrowers can access funds as needed, up to the maximum credit limit. You pay interest only on what you borrow with your HELOC. Once the draw period ends, the repayment period begins, and borrowers repay both principal and interest on the outstanding balance.
Most HELOCs have a variable rate, meaning the interest rate can change over time based on the Wall Street Journal Prime Rate (WSJ Prime). Some lenders offer fixed-rate options that allow borrowers to convert part of the balance to a fixed interest rate for predictable monthly payments. HELOC interest rates can vary based on factors such as credit score, loan-to-value ratio, and the lender’s terms.
To better understand how a HELOC works in practice, consider a small business owner operating a growing home-services company. The owner’s home is appraised at $600,000, and the outstanding mortgage balance is $360,000. This leaves $240,000 in home equity, calculated as the home’s value minus the outstanding mortgage balance.
If a lender allows a maximum combined loan-to-value of 85%, the total allowable borrowing against the home would be $510,000 (85% of $600,000). After subtracting the existing mortgage balance of $360,000, the maximum HELOC credit limit available would be $150,000.
Once approved, the business owner opens a HELOC with a $150,000 credit limit and enters the draw period. Rather than taking the full amount upfront, the owner initially accesses $60,000 to purchase new equipment, hire additional staff, and invest in local marketing to support business growth. Because a HELOC is a revolving credit line, the owner pays interest only on the $60,000 used, not the full credit limit.
As revenue increases, the business owner repays a portion of the balance and later accesses additional funds to cover seasonal working capital needs. This flexible borrowing structure allows the business to grow without committing to a fixed loan amount or paying interest on unused funds.
Over time, the owner converts part of the outstanding balance to a fixed-rate option to stabilize monthly payments as the repayment period approaches. Once the draw period ends, the repayment period begins, and the remaining balance is repaid through scheduled principal and interest payments. This example highlights how home equity, credit limits, and repayment structure work together to make a HELOC a flexible funding tool for certain small business owners when used responsibly.
Here are some key factors to understand when using a home equity line of credit.
Loan-to-value (LTV) is the ratio of the loan amount to the home’s appraised value. For a HELOC, lenders calculate LTV by dividing the total outstanding mortgage balance plus the HELOC line amount by the home’s value. Maintaining sufficient equity is essential, as a lower loan-to-value LTV generally improves credit qualifications and access to higher loan amounts.
Most HELOCs use a variable interest rate tied to the prime rate, meaning interest payments may increase or decrease over time. Borrowers may also choose fixed interest rate options for a portion of their balance. A fixed rate provides stable monthly payments, while a variable rate balance may fluctuate based on market conditions.
During the draw period, many HELOCs allow interest-only payments, meaning borrowers pay interest on the outstanding balance without reducing principal. Once the repayment period begins, monthly payments typically include both principal and interest, with a minimum required based on the remaining balance and term.
A HELOC is secured by the borrower’s home, typically in a second lien position behind the primary mortgage. Because the home serves as collateral, borrowers risk foreclosure if they fail to repay the outstanding balance.
Small business owners may use HELOC funds to support business operations, manage cash flow, consolidate debt, or cover significant expenses. Access to funds through a revolving credit line offers flexibility for businesses with fluctuating capital needs.
Using a HELOC for business funding can provide several meaningful advantages for homeowners who need flexible access to capital. One of the primary benefits is typically lower interest rates than unsecured financing options, such as credit cards or personal loans. Because a HELOC is credit secured by home equity, lenders often extend more favorable pricing, which can reduce overall borrowing costs—especially for significant expenses or ongoing funding needs.
A HELOC also offers greater flexibility than many traditional loans. As a revolving credit line, funds can be accessed as needed during the draw period rather than taken as a lump sum. This structure allows business owners to borrow only what is required at a given time and pay interest only on the amount used, making it a practical tool for managing cash flow, seasonal expenses, or unexpected costs.
Another advantage is repayment flexibility. Many HELOCs allow interest-only payments during the draw period, resulting in lower minimum monthly payments early on. This can help preserve cash flow while the business grows or stabilizes. Some lenders also offer fixed-rate options on portions of the balance, allowing borrowers to lock in predictable payments if interest rate volatility is a concern.
Potential tax benefits may apply if HELOC funds are used for home improvements, allowing for interest deduction, though eligibility depends on how the funds are used and individual tax circumstances. Borrowers should consult a tax advisor to fully understand the rules governing interest deductibility.
Finally, HELOCs can sometimes be easier to qualify for than traditional business loans, as approval is mainly based on home equity, credit history, and income rather than business performance alone. This can make a HELOC an appealing option for startups or self-employed borrowers who may not meet standard business lending requirements.
While a HELOC can be a powerful financing tool, it also carries notable risks that business owners should carefully weigh. The most significant drawback is that the borrower’s home is used as collateral. If the business struggles and cannot make repayments, the lender may have the right to foreclose on the property, making this a higher-stakes option than unsecured financing.
Interest rate variability is another key concern. Most HELOCs use a variable rate tied to the prime rate, which means interest payments and monthly obligations can increase over time. Rising rates can significantly impact affordability, especially once the repayment period begins and principal payments are required.
The risk of overspending exists with HELOCs due to easy access to funds, which can accumulate excessive debt. Because funds are readily available during the draw period, borrowers may be tempted to use the credit line beyond their original business needs, increasing the outstanding balance and long-term repayment burden.
HELOCs also come with upfront and ongoing costs. Closing costs, origination fees, annual fees, and draw fees may apply, reducing the net available credit line. In addition, the application and underwriting process can be lengthy, often taking several weeks and requiring extensive documentation and a home appraisal.
Finally, HELOCs are personal credit products, not business loans. This means the debt is tied to the individual rather than the business entity, which can limit liability protection and complicate finances if ownership structures change.
Qualification for a HELOC depends on creditworthiness, income stability, and sufficient home equity. Lenders evaluate credit approval criteria, such as those for a home equity loan.
Most lenders prefer applicants with good to excellent credit history. Many lenders require a credit score of 680 or higher to qualify.
The HELOC application process may include a credit check to assess the applicant’s creditworthiness. A higher credit score typically leads to a lower interest rate. Borrowers with a credit score over 740 can see significant interest rate reductions.
Debt-to-income (DTI) is a key underwriting metric lenders use to assess a borrower’s ability to manage monthly HELOC payments. DTI compares total monthly debt obligations to gross monthly income, helping lenders assess whether taking on additional debt is financially sustainable.
The DTI formula is calculated as:
DTI = Total Monthly Debt Payments ÷ Gross Monthly Income
Monthly debt payments typically include mortgage payments, property taxes, and insurance (if escrowed), auto loans, student loans, minimum credit card payments, and any other recurring debt obligations. Gross income refers to income before taxes and deductions.
For HELOCs, most lenders prefer a DTI of 43% or lower, though stronger applicants may qualify with ratios in the 36%-40% range. Some lenders may allow higher DTIs—up to 45% or even 50%—for borrowers with excellent credit history, high income, or significant home equity. However, these approvals are less common and may come with higher interest rates or lower credit limits.
Lenders will verify the applicant’s income and the home’s value during the HELOC application process to ensure the borrower can comfortably manage payments during the draw period and after it ends. A lower DTI generally improves approval odds, access to a higher credit limit, and eligibility for more favorable interest rate terms.
Home equity is the portion of a home’s value that the homeowner owns outright and is one of the most critical factors in determining HELOC eligibility and credit limit size. Borrowers must have sufficient equity to qualify for a home equity line of credit (HELOC), as the property secures the HELOC.
Home equity is calculated using the following formula:
Home Equity = Current Home Value − Outstanding Mortgage Balance
For example, if a home is appraised at $500,000 and the outstanding mortgage balance is $300,000, the homeowner has $200,000 in equity. However, lenders typically do not allow borrowers to access 100% of the equity.
Most HELOC lenders limit total borrowing—including the primary mortgage and the HELOC—to 75% to 85% of the home’s value, though some programs may allow higher limits. This limit is referred to as the combined loan-to-value (CLTV) ratio.
Using the example above:
This comparison shows how home equity directly impacts the available HELOC credit limit. The more equity a homeowner has, the larger the potential line of credit. Conversely, a higher outstanding mortgage balance reduces the amount available to borrow under a HELOC.
Lenders also consider equity alongside credit score and DTI. Even with substantial equity, a borrower may receive a reduced credit limit if their income or creditworthiness is weaker. Maintaining sufficient equity not only improves approval chances but also increases access to higher loan amounts and more competitive HELOC terms.
Applying for a HELOC involves submitting financial documentation and completing the underwriting process.
The HELOC application process typically requires a completed application form.
Applicants must provide documentation such as pay stubs, tax returns, and W-2s during the HELOC application process.
Lenders order an appraisal to determine property value and lien position.
Credit approval is based on equity, credit history, and income.
The HELOC closing process typically takes 30 to 40 calendar days after the application is submitted.
A HELOC may be denied due to insufficient equity, high debt-to-income, or poor credit history. If declined, business owners may explore alternative financing options such as business lines of credit, equipment financing, or working capital loans. United Capital Source can help connect applicants with alternative funding solutions.
A Commercial Equity Line of Credit (CELOC) is a financing option that allows business owners to borrow against the equity in their commercial property. Similar to a home HELOC, it provides a flexible revolving line of credit for business expenses, expansion, or working capital.
Borrowers can draw funds as needed and typically pay interest only on the amount used. CELOCs often feature variable interest rates, though some lenders offer fixed-rate options. Loan limits are based on the property’s equity and the lender’s underwriting criteria. This type of credit can be a cost-effective alternative to traditional business loans, providing quick access to funds while leveraging an existing asset.
A HELOC for business funding can be a flexible and cost-effective option for homeowners with sufficient equity. By understanding how HELOCs work, their advantages and risks, and alternative financing options, business owners can make more informed decisions about whether this type of equity line of credit aligns with their financial goals.
Because a HELOC is secured by home equity, it often offers lower interest rates and more convenient access to funds than many unsecured financing options. At the same time, borrowers should carefully consider risks, including variable interest rates, closing costs, and the risk of losing their home if repayments are not managed appropriately.
For small business owners evaluating different ways to fund growth, manage cash flow, or cover major expenses, a HELOC may be one of several viable solutions. United Capital Source provides educational resources and referral support to help business owners compare HELOCs with other business financing options and determine the most appropriate path based on individual circumstances, credit profile, and long-term objectives.
