By Marco Terry
Managing Director, Commercial Capital LLC
One of the greatest challenges that you face when you launch a home-based business is finding a way to finance it. Most first-time entrepreneurs approach financing the wrong way by chasing funding sources that have very little chance of working for their niche. For example, entrepreneurs who hope to get a business loan or attract an investor spend a lot of time developing business plans and presentations. The reality is that most home-based businesses never qualify for a conventional business loan and have little chance of getting investor funding.
Finance Your Home-Based Business
This article discusses five tried-and-true financing options that can help finance your home-based business. All options, except option #4, can be used by any business.
Option #1: Your Own Savings
Most home-based entrepreneurs launch companies with their own money. They use savings, credit cards, investments, and other assets. If your business and finances allow it, this option is the best way to finance your company. Using your own resources gives you the most freedom since you don’t need to answer to investors or creditors.
Much like saving for a house, saving enough seed money to get a business going takes time, dedication, and persistence. A word of caution: be careful about funding your company by taking out a second mortgage on your home or using your retirement funds. Unfortunately, many small businesses fail in their early years, and you should not put your home – or retirement – on the line.
Option #2: Friends and Family
While many entrepreneurs swear by this option, home-based business owners should be cautious about getting financing from friends and family. Business, friends, and family seldom mix well and can lead to lost – or damaged – relationships.
If you opt for this type of funding, use a loan rather than selling a piece of the business (equity). Unless your financier can provide expertise or contacts, it’s best to keep the equity for yourself. Furthermore, a loan provides the lender with a clean exit after repayment.
Treat friend and family investors professionally: have an attorney draft a legal loan arrangement, honor the agreement, and make your best effort to ensure they get paid in full.
Option #3: SBA Microloans
The Small Business Administration (SBA) has an excellent, but little- used, Microloan program that is ideal for home-based entrepreneurs to finance their home-based business. Microloans can provide up to $30,000 of startup or operating capital without the conventional requirements of a business loan. Furthermore, these loans are often coupled with business management training to help ensure your success. All home-based business owners that need financing should consider this program.
Option #4: Invoice Factoring Financing
Invoice factoring financing allows you to fund a home-based business (e.g., consultants, engineers, importers) that has commercial clients. One of their main problems is that commercial clients usually pay invoices in net-45 to net-60 days (often catching home-based business owners by surprise), and this delay can lead to cash flow problems. Invoice factoring financing accelerates cash that is tied in slow-paying invoices, providing working capital to pay operating expenses.
Factoring financing can be more expensive than other types of funding, so it should be used only if your business has high profit margins – at least 30%. Consider it as an option to finance your home-based business.
Option #5: Local Community Development Programs
Many cities and counties have specific financing programs to help small business owners finance their home-based business. These programs are highly local and can include financing and technical assistance, much like the SBA Microloan program.
Unfortunately, there is no central listing of these programs, so they can be hard to find. However, since these programs are hard to find, they are often underutilized. This knowledge gives you an important advantage – if you are willing to do some research to find them.
Start by looking at your local county or city government website to find ways to finance your home-based business. Some – but not all – of these programs are listed in there. Another alternative to finance your home-based business is to contact your local Small Business Development Center (SBDC), who may be able to point you in the right direction.
About the Author
Marco Terry is Managing Director of Commercial Capital LLC, a leading provider of invoice factoring and purchase order financing for home businesses. He can be reached at 877-300-3258.