Financing New Business Debt
REM # A592
By Ilyce R. Glink
Summary: A small business owner wonders how to handle the start up costs that are currently on two low interest credit cards. Ilyce comments that the answer depends on how you set up your business and if the debt is personally guaranteed.
Q: I recently became a small business owner and have acquired a nice amount of debt getting my business started. The debt is currently on two low interest credit cards.
I am a homeowner with quite a bit of equity in my home. Should I increase the line amount on my home equity credit line to transfer the debt from the credit cards?
My second dilemma is that I currently have an adjustable rate mortgage that I am looking to refinance. Will increasing the amount of the mortgage affect refinancing in any way?
A: The question about your business debt is interesting. The answer depends on how you set up your business.
For example, if you incorporated your business and the debt belongs to the business, then transferring it to make it a personal debt might not be the right way to go. If it's a business debt, without a personal guarantee, and it resides on business-owned credit cards, if your business fails you may not have to make good on the debt personally.
However, if the debt is personal, and you've personally guaranteed it on your own credit cards, then you may want to refinance your mortgage to move the debt to something that would have a more manageable interest rate over a longer period of time.
Either way, you need to talk to your accountant or tax advisor to go through the various business issues. You should also raise the question of how to document your business debt, just in case something happens or you decide to sell the business.
As for refinancing, you may pay a fee of up to .75 percent of the amount of your new loan if you increase your mortgage amount when you refinance. While this shouldn't affect whether or not your interest rate rises (unless the loan will exceed $330,700, which is the point at which a conventional loan turns into a more expensive jumbo loan), you'll want to sit down with a couple of good loan officers to walk through the costs and benefits of refinancing.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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