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When I'm advising a small business owner who's considering a home equity line of credit (HELOC), the first thing we usually talk about is how much of their home they own. That's because even if you've paid down a good chunk of your mortgage, you still might not have enough equity to get a HELOC.
What a lot of people don't realize when first looking into this financing option is that most HELOC lenders limit how much you can owe across both a HELOC and mortgage combined. Many require that you still own at least 15% to 20% of your home's value after accounting for what you borrow through the HELOC, so you can't really borrow against every single dollar of equity you have in your home.
The more equity you have beyond the amount your lender requires you to retain, the more borrowing capacity you may have.
I'll explain how to calculate your home equity and potential borrowing capacity, along with the other factors lenders consider.
Understanding LTV and CLTV
The way a HELOC works is that it allows you to borrow money on a revolving basis, via a line of credit. It's secured by your home and lets you borrow against the equity you've built in it.
How much equity you have, along with your loan-to-value (LTV) and combined loan-to-value (CLTV) ratios, helps determine how much you can borrow.
I'll define these terms a little more clearly:
| Definition | Example | |
|---|---|---|
| Equity | The difference between what your home is currently worth and what you still owe on your mortgage | If your home is worth $500,000 and you still owe $300,000 on your mortgage, you have $200,000 in equity |
| LTV | Compares what you owe on your mortgage with your home's value | If your home is worth $500,000 and you still owe $300,000 on your mortgage, your LTV is 60% |
| CLTV | Compares the total amount of debt secured by your home, including your existing mortgage and the HELOC you're looking to take out, with your home's value | If you owe $300,000 on a $500,000 home and want a $100,000 HELOC, your combined debt would be $400,000, giving you an 80% CLTV |
CLTV is especially important for a HELOC because it accounts for both your mortgage and the proposed credit line. Lenders will typically have a maximum CLTV number they allow, often around 80% to 85%, which caps how much you can borrow through a HELOC.
Let's use the same $500,000 home example from the chart. If your HELOC lender allows a max CLTV of 80%, that means your mortgage and HELOC can be no more than $400,000 combined. If you still owe $300,000 on your mortgage, that leaves about $100,000 left that you could borrow through a HELOC.
This is also why having 20% equity doesn't always necessarily mean you can get a HELOC. If you own exactly 20% of a $500,000 home, for example, you'd owe $400,000 on your mortgage. With an 80% maximum CLTV, you're already at the lender's limit. You'd need more equity (or a lender that permits a higher CLTV) to borrow through a HELOC.
An Easy Way To Calculate How Much You Can Borrow
This is the basic formula to figure out how much you may be able to borrow through a HELOC:
(Home value × lender's maximum CLTV) − mortgage balance = potential HELOC borrowing capacity
To illustrate how this works, let's again say that:
your home is worth $500,000
you still owe $300,000 on your mortgage
your lender allows a maximum 80% CLTV
First, you'd find the maximum amount of debt the lender will allow against the home:
$500,000 × 80% = $400,000
Then, you'd subtract what you already owe on your mortgage:
$400,000 − $300,000 = $100,000
That means, in this example, you could potentially qualify for a HELOC of up to $100,000 based on the property and CLTV alone.
How To Know When a HELOC Is the Right Move
Just because you have significant equity in your home doesn't necessarily mean you should use it as collateral when borrowing. The biggest tradeoff in a HELOC is that, if for some reason you should default on payments, you risk losing your home.
A HELOC probably isn't the right move when you're borrowing to cover ongoing losses, don't have a clear repayment plan, or couldn't comfortably make the payments if business revenue temporarily declined. For example, Dave Ramsey generally advises his audience to avoid HELOCs because they create additional debt secured by the home.
For an established business owner or investor with steady business revenue and a clear plan for the money, though, borrowing against that equity can be a calculated way to access capital, as long as the potential business benefit justifies the cost and risk. I think getting a HELOC for business financing makes sense if you have strong home equity, want a lower rate than other types of business financing, and are comfortable with the risk.
Since a HELOC is a revolving line of credit, it tends to be especially helpful for covering costs where you don't know exactly how much you'll really need. For example, I've seen small and midsize business owners use HELOCs for:
Opening a new location
Cover expenses such as renovations, furniture, signage, deposits, or other costs associated with expanding into another location.
Buying equipment or inventory
Purchase equipment or stock up on inventory without necessarily drawing your entire available credit line at once.
Managing a slow season
Help cover payroll, rent, utilities, or other operating expenses when revenue temporarily slows.
Consolidating higher-cost debt
Pay off higher-cost business debt if the HELOC offers a lower rate, potentially reducing financing costs.
Other Things Lenders Will Look For
Equity isn't the only factor in getting a HELOC. Lenders will also want to look at things like:
| Credit score | Debt-to-income ratio (DTI) | Income and financial reserves | Business documentation |
|---|---|---|---|
| Your credit history helps lenders evaluate how reliably you've handled debt in the past | Your DTI compares your monthly debt payments with your gross monthly income; lenders use it to determine how much room you have in your budget for an additional payment | You'll generally need to document sufficient, reliable income and/or available cash to repay what you borrow | If you plan to use your HELOC for your business, some lenders may want additional information about your company, like revenue history, business formation documents, or a business plan |
Why Business Owners Work With Clarify
Clarify Capital offers HELOCs for businesses. When you're ready, my team and I at Clarify Capital can help you review your qualifications and explore options. Get started and apply today. Here's how the process works:
Step 1:Apply online
It takes about two minutes. You'll need your business's legal name, EIN, time in business, monthly revenue, requested loan amount, owner contact information, and a credit authorization.
Step 2:Connect with a lending advisor
A U.S.-based Clarify Capital lending advisor reviews the application, runs a soft credit pull (no impact to your score), and requests 3 to 4 months of recent business bank statements.
Step 3:Get matched and funded
Clarify Capital works with 75+ vetted lenders and matches your profile with the right financing. Approvals often get a same-day offer (SBA loans can take longer).
Clarify Capital's 5.0 Trustpilot rating is the highest in the industry, and we've placed more than $1 billion across 50,000+ small-to-midsize businesses (SMBs).
Clarify matches you across 75+ vetted lenders and can get you a written offer in as quickly as 24 hours. Every applicant works with a U.S.-based lending advisor (not a chatbot or a call center) from application through financing.
Minimum Qualifications
For Financing Through Clarify Capital
$10,000 in monthly revenue
Your business must earn at least $10K per month in a business bank account.
500+ credit score
You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.
Minimum six months in business
Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.
Have a business bank account
Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.
Frequently Asked Questions
Here are answers to common questions I get about HELOCs and business financing.
How Is a $50,000 Home Equity Loan Different From a $50,000 Home Equity Line of Credit?
Don't confuse a HELOC with a home equity loan. If you take out a $50,000 home equity loan, you generally receive the $50,000 as a lump sum and begin repaying that loan. With a $50,000 HELOC, you have access to a revolving credit line of up to $50,000 and can use it as needed during the draw period. As you repay what you borrowed, that credit becomes available to use again.
Can I Get a HELOC With 20% Equity?
Oftentimes, yes, but it will depend on the specific lender requirements and how much you owe on your home. For example, if you have exactly 20% equity and a lender allows a maximum CLTV of 80%, you may not have any remaining equity available to borrow against. A lender with a higher CLTV limit could give you more borrowing room.
How Much Equity Do You Need To Use a HELOC For Business Financing?
Many lenders require that you still own at least 15% to 20% of your home's value after accounting for what you borrow through the HELOC.
How Much Would a $50,000 HELOC Cost Per Month?
If you draw $50,000 from a HELOC with a rate of 10%, an interest-only payment would initially be about $417 per month. If your variable rate later increased to 11%, that monthly payment would increase to about $458 (assuming you still owed the full $50,000). Your actual cost will depend on how your benchmark rate changes, how much you draw, and how quickly you repay it.
What Does Dave Ramsey Say About HELOCs?
Dave Ramsey generally recommends against HELOCs. His main arguments are that they put the property at risk and create a new debt that doesn't generate cash flow.
How Does Clarify Capital Protect My Business and Financial Information?
Clarify Capital follows SOC 2 (Service Organization Control 2) security principles designed to protect sensitive business and financial information. This includes safeguards such as secure data handling practices, controlled access to information, and ongoing monitoring to help protect your data throughout the application and funding process.
Bryan Gerson
Co-founder, Clarify
Bryan has personally arranged over $900 million in funding for businesses across trucking, restaurants, retail, construction, and healthcare. Since graduating from the University of Arizona in 2011, Bryan has spent his entire career in alternative finance, helping business owners secure capital when traditional banks turn them away. He specializes in bad credit funding, no doc lending, invoice factoring, and working capital solutions. More about the Clarify team →
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