As a small business CEO, you know that businesses go through cycles. Sometimes business is so good that you can’t keep up with demand. Other times, it seems like the market is stuck in the mud. Customers are not coming through the door and your expenses keep piling up. What can you do? Banks won’t finance your business, even though you have a long history in the market.
Well, if you are over 62-years-old, I have a secret financial weapon which could help you save your business. It’s called a reverse mortgage, and it could be just the ticket to get you the money you need.
What is a reverse mortgage?
It is a loan, with a twist. This financial product has been around since the 1960’s but it has become more commonplace in recent years. Basically, a reverse mortgage allows you to tap into the equity you have built in your home. But there are no monthly payments. All you need to pay with a reverse mortgage are the property taxes, insurance, and utilities. That’s it. You are basically freezing any future mortgage payments for as long as you live in your house.
In this way, a reverse mortgage is not a home equity loan or a second mortgage as you don’t need to make monthly payments as long as you continue to live in your primary residence. Furthermore, the funds can be used for almost anything from giving you a little extra money during retirement, to paying unexpected medical costs, or even to provide additional financing for your business.
Another plus of reverse mortgages are the low-interest rates. Generally, in the range of 5% and there a number of reverse mortgage lenders offering fixed interest loans. As such, you can get the money you need for your business today, but you won’t have to bear the cost of servicing the loan or have to worry about interest rate increases down the road. This is a key point when you are looking at long-term funding options in the age of historically-low interest rates.
Reverse mortgage enables you to leverage your most valuable asset
Granted, this approach is not for everyone. But in cases where you have sufficient equity in your primary residence, this could be a low-cost, low-hassle way to get the money you need today.
In fact, more advisors are taking a closer look at this option for their clients. Why not? Your home might be the most valuable asset you own. With a reverse mortgage, you can leverage that value for the benefit of your business without the debt service costs, and risks, of other forms of credit.
That being said, reverse mortgages are loans just like traditional mortgages. As such, interest is accrued on the unpaid balance. There are also closing costs for things like mortgage insurance, origination fees, and third party fees – i.e. lawyers, appraisal services, etc.
The most popular reverse mortgage program on the market today is the Home Equity Conversion Mortgage (HECM) from the Federal Housing Administration (FHA). Wow, that is a mouthful.
For a small business CEO, the advantage of a HECM reverse mortgage is that more lenders offer this option. This means that you can shop around for the best rates and closing terms. Another plus that the mortgage limit is now $625,000. While this won’t help you if you need a couple million for your business it could be just the thing to get you through a cash crunch.
Furthermore, there is no prepayment penalty for the HECM. So if you need cash fast you can leverage a reverse mortgage to help your business and then pay it back so that you can use the equity in your home for another purpose down the road.
Financing your business via reverse mortgage
Back to your business. As you are all too aware, big banks don’t really make loans to small businesses anymore. While there are other options on the market, the costs generally tend to be much higher than a reverse mortgage. So while this approach is slightly unorthodox, it could be a great option to get your business back on level footing.
That being said, taking on a loan for your business is a balance between your cash needs and your risk tolerance. In the end, using a reverse mortgage to save your business is just one of several options you should look at. Depending on the fit, it might be the right choice.