Alternative options

When entrepreneurial small business owners want to bring a great new idea to market, financing can be a challenge. These businesses may fall below the small business lending thresholds of large banks, or their income may fluctuate too broadly during the year to allow them to qualify for conventional mortgage financing.

For many, the solution is a home equity loan that allows them to take advantage of the full value of their home while enhancing their business.

That may be the best option, but it isn’t the only road to success. The community lending departments in most banks can help small business owners examine available financial products to find the financing vehicle most appropriate for their circumstances.

Home equity loans, for example, may carry variable rates, meaning borrowers must be prepared for fluctuations in payments over the life of the loan. However, they offer term payment structures for specific purposes, such as clearly defined business projects. Home equity loans also allow borrowers to consolidate debt, combining credit cards or automobile loans for a single monthly payment, with the added benefits of lower debt services and, often, tax deductions.

Some entrepreneurs, however, experience significant and unusual income fluctuations during the year that may preclude them from qualifying for term loans. A better option may be to refinance their homes and take cash out with an interest-only mortgage loan. These loans feature fixed interest rates for five years, during which borrowers are required to pay only the interest but have the option of paying as much or as little of the principal as they choose. After five years, the remaining balance is amortized over 25 years.

Interest-only loans may also appeal to first-time homebuyers who can use them to moderate the initial sticker shock of mortgage payments, especially when they anticipate their income will increase during the first five years of the loan. Interest-only loans are particularly attractive to buyers who purchase property in rapidly appreciating areas and who don’t plan to stay in the homes longer than five years.

Another alternative that community lending borrowers may want to consider is a no-documentation or limited-documentation adjustable rate mortgage. These mortgages are driven by credit scores so business owners with complex tax returns, or those who want to apply for financing without submitting the full documentation required on most conventional loans can use stated income to qualify. So long as the applicants have good credit scores and have paid existing loans as agreed, these loans can streamline the application and approval processes.

These loans feature initial five-year fixed rates with amortizing payments.

In deciding what financing best suits their needs, borrowers also must consider the lender. Not all companies disclose all their fees up front. Banks, heavily regulated and monitored, must make full disclosure well before loans close, preventing any unpleasant surprises at closing.

Even more important, borrowers should look for a bank that understands their goals and objectives and has bankers who will advise them on how to use financing to achieve those goals. Personal bankers who take the time to get to know their customers understand that some borrowers need to obtain the lowest possible payment, while others will be better served with a loan they can pay down as quickly as possible.

Borrowers today are more sophisticated than ever in understanding the various products available to them, but they should seek out the banks — and the bankers — who can help them understand exactly what each product means to their specific situation.

Tom Munoz is senior vice president in the community lending department of MB Financial Bank. Reach him at (708) 225-3872 or