Deciding on Funding Choices

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Business loan vs Equity loan?
Posted by: Tom L. Mar 3 2004, 05:35 PM
I have a question about purchasing an existing business. I’m about to buy a small business and it costs aound 30k. There are three options that I have on my plate (giving that my credit line is supper >7.9):

1. Cash (on hand aound 70K)
2. Equity Loan (50K at 3.75 for equity line or fix at 6.26)
3. Business Loan (?)

what is the best option do I need to take to achive my goal (that’s saving money and utilize taxes)?

Posted by: loanuniverse Mar 3 2004, 08:25 PM

When approaching this kind of decision there are two schools of thought.

Some people will say that the best thing would be to match the need for funds with a product made specifically for that need. In this case, We are talking about some kind of business loan to purchase the business. They are extending the concept of matching, which is very valid when you are talking about financing working capital with short-terms lines of credit, and capital expenses with term-loans.

However, I disagree with going with a business loan in your case mostly because it will be hard to beat the pricing on the equity loan option.

The way I see it, you want to get as low a cost of funds as possible, and only use your cash if you can not get a return equal or better to your lowest cost of funds. When talking about a small business purchase like that, there is next to no possibility that the lender will not require a personal guarantee for the loan.

If you are going to be on the hook for the loan what is the benefit of paying more in interest? Tax deductibility? I try to avoid anything that affects my bottom line.

On the other hand, going with the home equity loan means that the creditor can foreclose on your house if you fall behind. Although I am a big fan of home equity products, specially in this environment of low rates, that is something to consider.

I think that your choices are really between the home equity and the cash on hand. If you have the cash in a checking account or a low paying CD, the decision is easy. In addition, if you feel uncomfortable pledging the house you might decide to use the cash.

Hope this helps.
Author: Commercial Loan Underwriter