Many small companies usually start as home-based businesses. It is at this stage where the owner lays the foundation for their future business. It’s also the stage where owners face their biggest challenges. Aside from getting clients, one of the biggest challenges for business owners is finding the right type of financing.
Unfortunately, home-based businesses have few financing options. Most don’t have the assets or the track record needed to qualify for conventional bank financing. Instead, they must look for alternate and specialized options.
Smart entrepreneurs use these financial options as transitional financing. Basically, they use this funding to grow the company to a point where they can qualify for better options.
We have compiled a list of eight sources of financing that home based entrepreneurs can use. At least one option (#1) can be used by anybody. Other options have some specific requirements.
1. SBA Microloan
The Small Business Administration has a financing program that specifically helps small business owners, self employed individuals, and home based businesses. It’s called the SBA Microloan Program. The program provides small loans, usually up to $50,000. These loans can be used to start, manage, and grow a small business. The type of loan and requirements varies by state.
One of the advantages of Microloans is that they come bundled with business training. This can be valuable for small business owners who have great technical skills but need help managing their growing business.
Note that the SBA does not offer the loans directly, but rather works through intermediaries.
2. Small Business Factoring
Whenever a home based business sells a product or service to a larger company, they must wait 30 to 60 days to get paid. This is often referred to as offering net-30 terms. The problem is that many business owners can’t afford to wait that long for payment. Unless you have another job or another source of income, you need that money to pay your salary and business expenses.
One alternative that can help you is a small business factoring program. Factoring works by financing your slow paying invoices from creditworthy commercial clients. You get funds immediately, while the factoring company (i.e. Commercial Capital LLC) waits 30 – 60 days until the invoice is paid. Factoring is fairly easy to obtain, even by small business owners. The financing line is usually flexible and can grow with your business as it adds more clients.
3. Finance Purchase Orders
Many product resellers and wholesalers operate as home based businesses. Usually, they manage purchase orders from large clients and work with suppliers to have the product delivered. Home based resellers often run into problems when they get a very large purchase order. They are often faced with a supplier that wants a pre-payment and a client that will pay on net 30 – net 60 day terms. Unless you have the funds to handle the order, you risk loosing the client.
One option that works well in this scenario is to finance your purchase orders. This provides funding so you can pre-pay suppliers. It allows your suppliers to manufacture and deliver the goods. More importantly, it allows you to book the order and get the client. Often, purchase order funding lines are used in combination with factoring because they allows you to keep costs in check.
If your home-based business needs equipment, consider if leasing will be a better option than buying. Leasing allows you to rent the equipment for a monthly payment, rather than paying for it outright. Many leases have a structure that enables you to purchase the equipment for a nominal amount (i.e. usually $1) at the end of the lease period.
You can find more information at the Equipment Leasing and Finance Association.
5. Peer to Peer Lending
One way to get financing for your home-based business is to use peer to peer small business lending. Peer to peer lending allows you to borrow from other individuals. The size of the loans varies based on where you get the loan from. On average, they max out at $35,000.
Keep in mind that most peer-to-peer solutions do not lend money to businesses. Instead, individuals lend money to other individuals, who may use the funds to run their businesses. It may sound like a small difference but it is an important one. Loans are usually structured as personal loans rather than business loans.
6. Home equity line
One common way to finance a home-based business is to use a home equity line. These types of loans allow you to tap the equity of your home and use it for personal or business purposes. They have the advantage of being cheaper than many other options. However, they do carry a substantial risk. You are putting your home on the line. If they business fails and/or if the mortgage payment became unmanageable, you could loose your house.
You can get home equity lines, often called HELOCS, at most banks.
7. Credit cards
Most entrepreneurs have used their personal credit cards at one time or another to pay for business expenses. This is a time honored tradition. However, it does carry some risk. If you fail to pay the credit card, you could ruin your personal credit and still be liable for the money.
However, you can use them as long as you understand that it is a calculated risk. Use credit cards only for business expenses associated with a specific client order. And, pay the credit card back as soon as your client pays. Remember, this is expensive money.
8. Friends and Family
One final alternative is to get a loan or an investment from friends or family members. There are many benefits and risks to this type of funding. The biggest risk is that you could loose the friendship of your friends and family members if something goes wrong. This risk is very real.
If you decide to get an investment from friends and family, treat them like you would treat any professional investor. Disclose all information, discuss risks, get an attorney to draw proper legal documents, and make every effort to pay them back. Lastly, if you decide to use this option, partner with people that can bring experience or contacts as well.
Looking for financing?
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