Funding for Home-Based Business

 Starting a business from your home can be a great idea. Because you don’t need to rent premises, you can lower operating costs. You’ll also have more flexibility, deciding your own schedule. But, like all businesses, you’ll need to have access to adequate funding. This will give you the money you need to start a home-based business or expand an existing one.

Why Your Funding Options Might be Limited?

Starting a home-based business can often be one of the most stressful experiences that you’ll face. There will be a lot of challenges that you’ll need to overcome. But there are some reasons why you might not have access to the same funding options are more established businesses. First, you won’t have an established track record. This can make it harder to prove to lenders that they can trust you. Also, you might not have as much extensive equipment. This can limit the amount of collateral that you will be able to offer.

While a bank or other traditional funding might not be possible, there are still lots of ways to get a home-based business loan. Let’s take a closer look at some of the options that you can explore.

SBA Loans

The government wants to support the growth of small businesses, making sure that owners have the resources they need. Because of this, they have set-up a range of loan agreements. You’ll need to apply to these through an intermediary, who’ll provide you with the funding.

These loans can range in size. For example, a microloan might be able to start at $50,000. However, you can request more, depending on what you intend to use the funding for. Some typical examples of what you might use an SBA loan for are refinancing debt, getting working capital, purchasing new equipment, or expanding the business. It should be noted that you’ll often need to have spent at least two to three years operating the business. The only possible exception is start-ups where you can show that you have relevant experience.

The amount of money that you are applying for will dictate the terms of the loan. For example, if you get a microloan, you might only need to hold it for a year. However, if you’re planning on taking out a lot of money, to buy commercial properties, it can take 25 years to repay. The amount that you’re borrowing will also affect the interest rates.

Equipment Leasing

Though you might be running the business from your home, you’ll still need to get the right equipment. If this is the case, you might want to consider leasing. In this model, you’ll lease but now own the equipment. Then, you’ll need to pay a monthly fee to use it.

Equipment Financing

At first glance, equipment financing can look similar to equipment leasing. You’ll get a piece of equipment and need to pay a monthly fee to use it. However, at the end of the rental period, you’ll own the equipment outright. This can be the better choice if you will be using the equipment regularly. In most cases this lease period will last for between six to 24 months, depending on the amount that you want to spend. To consider this option, you’ll often need to have been in business for at least three months. You might also need to have a monthly revenue of $6,000.

Home Equity

In some cases, you might want to take out the equity on your home. This can give you access to a lot of funding, depending on the value of the property. But, it’s also one of the riskiest options. If the business fails, you risk losing the house. Because of this, you should consider the monthly repayments. You need to make sure that you can keep up, even if the business doesn’t go well.

Unsecured Line of Credit

This makes it one of the most flexible funding options that you can explore. Because it’s unsecured, you won’t need to put up any collateral for the loan. Once you get this line of credit approved, you’ll be able to use it whenever you need fast cash. For example, if an unexpected emergency comes up, you’ll be able to access the line of credit. You’ll only need to pay interest on the money that you take out. You can then repay the funds based on your budget.

If you want this type of financing, you’ll need to have at least six months of experience in the business. You’ll also need a FICO score of 620 and monthly revenue of $25,000. When you apply, you’ll also need to submit the last three months of bank statements. This will allow the lender to get a better understanding of the health of the business, helping them decide how much they should approve you for.  

Get a Loan From Friends and Family

If you don’t want to use a lender, you can try asking friends and family members to provide you with the funds. This offers a few benefits. First, they tend to offer you a better interest rate than a commercial lender. Also, they will be easier to negotiate with if you need to change the terms. Because of this, there will be less paperwork. This can mean that a loan like this won’t impact your credit score.

However, this can lead to big potential problems. Sadly, this can often cause disputes, driving relationships apart. Also, unless you get the contract in writing, it can lead to major legal problems. Because of this, if you choose to use this option, you’ll need to treat it as seriously as a commercial loan. Make every effort to pay them back. You’ll also need to ensure to make sure that you’re both clear on the agreement before any money changes hands.

Purchase Order Financing

Another option that you might want to consider is purchase order financing. In this case, the lender will contact the customer to verify the order. Then, they will contact the manufacturer, paying for the supplies you need. When you ship the order, the customer will pay the lender. The lender will subtract all the fees. They’ll then transfer any profits to you.

This ensures that you’ll have the equipment you need to fulfill orders, without getting overwhelmed. It also prevents any potential cash flow problems, allowing you to make sure that you have plenty of products available to send to customers. This is one of the safest types of loans, as you don’t need to put up any collateral. However, it can only be used for finished goods. It’s also been designed as a short-term solution, rather than a long-term way of improving your business.

Merchant Cash Advance

Finally, you might want to consider a merchant cash advance (MCA). This loan option is designed to make it easy for you to repay the funds. In this case, you’ll apply for a loan as you normally would. However, the repayments will be taken as a percentage of future sales. This is often easier to manage than a traditional monthly repayment. Also, these loans tend to have a shorter repayment term. In most cases, it will be between four to 18 months, depending on the amount that you take out.

If you want to apply for a merchant cash advance, you’ll need to have at least three to six months of experience. You’ll also need to have a minimum FICO score of 500. The monthly revenue will need to be at least $10,000. When you apply, you’ll be asked to provide bank statements and credit card details. This will give the lender a better idea about how much they should approve you for.

Which Funding Option is Right for you?

As we’ve seen, there are plenty of home-based business funding options. Each of these comes with its own set of pros and cons. So, how can you decide which one will suit you the best?  Let’s look at some of the things that you might want to consider.

One of the first things that you need to do is decide how quickly you want the funding. Do you need it urgently, to start a new project? Or are you happy to wait a little longer for the money to come through?  Each funding option will have its own timeframe. Generally, though, when you choose alternative funding you’ll be able to get fast cash. Once approved, it will be a matter of days until the money is in your bank account.

Another important factor to consider is what you plan to use the money for. This will often indicate what type of loan will be the best. For example, do you need a quick cash injection to overcome some unexpected expenses? Or do you need a more substantial amount of cash to purchase important new equipment? Do you want to use the money to purchase a property? 

Finally, before you make any important decisions, you’ll need to consider your financial position. This will give you a good idea of how much you’ll be able to afford to repay. It’s also a good idea to talk to a professional financial adviser. They will be able to talk you through each of the options in more detail. They can discuss the goals of the business. Then, they’ll be able to deliver a recommendation, based on the unique circumstances of the business.

Conclusion

Owning a home-based business can be a great opportunity. It will make it easier to take control of your finances, as you decide what hours you work. But it can also be hard to get the capital you need to grow. Some banks might not take you seriously, because you don’t have an office. Thankfully, there are plenty of options for financing a home-based business. We took a brief look at some of the most popular funding choices. If you want more information about how you can implement them into your business, contact an alternative funding provider, like South Florida Funding Group.  Our team will be able to talk you through the options, help you find the right one, and apply. So, get in touch today to find out how we can help.