Home businesses vary widely in size and scope, making financing needs vastly different. Some home businesses may only require a few hundred dollars to get going, but others, like the purchase of a franchise, may require home business loans or equity investments of $100,000 or more. Selecting an appropriate financing partner is an important decision in the set-up of a home business. Whether you decide to invest 100% of your own money, seek funding from outside sources, or do a little bit of both, make sure you review all the options available to you before making a decision.
GETTING PREPARED FOR A HOME BUSINESS LOAN
Make sure you have all the necessary documentation prepared and ready to go before you start approaching individuals or institutions for financing:
- A well researched and written business plan.
- A clear understanding of your personal credit history and why this is important.
- Typical documentation needed for small business financing.
BUSINESS LOAN & FINANCING OPTIONS
Your Own Money:
Where possible, a financial investment in your own business is important. It basically says you are willing to put your money where your mouth is. If you don’t have cash readily available, it may be time to consider selling that motorcycle you never ride and putting those funds towards your business costs. If you are considering dipping into your retirement account, I strongly advise you to research the pros and cons before doing so.
Family & Friends:
Friends and family financing is a good option to consider when starting a business. They know you better than anyone else and may be more inclined to invest in your idea. Mixing family and friends with business can open a whole can of worms, so manage this carefully. Consider using an online intermediary to assist you in drawing up official loan documents and amortization schedules.
SBA Bank Loans:
The Small Business Administration (SBA) is a United States government agency that provides support to small businesses. SBA loan programs are operated through private lenders and are guaranteed by the SBA. The Agency has no actual funds for direct lending or grants. Most banks and credit unions are familiar with SBA loan programs so if you are interested, contact your local lender for further information and assistance with the SBA loan application process.
Online Peer-to-Peer Lending:
Instead of borrowing from a bank, you can borrow money from other individuals. Many online providers are available to match you with one or more people who will offer to loan you money. On these sites, individuals may even compete with each other to get you a better rate. Make sure and research the provider, review how peer-to-peer lending works and read the fine print about additional fees etc.
- Lending Club
- Kick Starter (this is a site specifically tailored to raising money for things of a creative nature, like a music, art, film, publishing etc.)
Other Bank Loans:
If an SBA loan isn’t a great fit, you could seek out a personal loan from your local bank, however, when considering this type of loan make sure you understand the risks. Another option is to apply for a home equity loan or line of credit (if you have a good credit score and enough equity in your home). Be thoughtful when considering this option. The risk of using a home equity loan is if you don’t pay this second mortgage, the bank can take your home. Additionally, there are limits to how much the bank can lend.
If your bank rejects your application and you meet certain criteria, your business may qualify for funding from a micro-lender, which is a nonprofit organization that loans small amounts of money to very small businesses. It is important to note that recipients are most often poor people in urban areas and/or developing nations.
Credit cards should be a last resort because of the unpredictability in using them to finance a business. The interest rates are very high (low introductory rates can go up after a few months), credit limits can be reduced without warning, and there are fees if you use a credit card for a cash advance. However, a recent study conducted by the NSBA shows that 59% of small businesses use credit cards to finance their business in some way.
Rare or Unlikely Funding
- Grants: Some Grants are available to businesses that meet very stringent circumstances. It is very difficult to get a government grant.
- Angel Investors/Venture Capital/Private Equity: These firms are typically looking to place much larger amounts of capital than a typical small business requires.
This article is part of a 10-Step Guide on How to Start a Home Business.