Running a home-based business can help lower your costs, but it can sometimes present challenges when financing is needed. The good news is that there are still borrowing options available – you just need to know where to look! Let’s take a closer look at financing a home-based business.
What financing challenges do home-based businesses face?
Home businesses have access to a good number of business loan and financing options, even if they don’t have as many choices as larger companies do. When seeking financing, it’s helpful to understand why home businesses sometimes face challenges:
- Length of time in business. According to the U.S. Small Business Association, 50% of all small businesses begin at home. What this means, is that many home-based businesses are fairly new. New businesses typically have a more difficult time securing financing than their established counterparts, as they don’t yet have a proven track record that lenders can use for underwriting. While a business plan can be helpful when applying for financing, it’s not as valuable as a proven sales record. If the business doesn’t yet have enough history behind it, the business owner may need to take out financing using their own credit – which can be risky.
- Lack of business assets. Businesses that are run from home tend to have fewer assets than businesses based outside of the home. Businesses that own a building or other facility, and those that have substantial equipment, have an advantage when it comes to being approved for financing, as they can use those things as collateral. Home businesses on the other hand don’t typically have much in the way of collateral, and may need to offer a personal guarantee to secure the loan.
Business Loan and Financing Options
Despite the challenges mentioned above, there are some specific types of financing that could potentially be a good fit for businesses run from home. These include government loans made available through the Small Business Association (SBA), specialized financing, credit cards, and crowdfunding.
- SBA Microloan. The SBA microloan program provides up to $50,000 for equipment, inventory or working capital. Terms for microloans vary but are generally quite favorable for small businesses. Unlike most traditional business loans, SBA microloans are available to small businesses with little to no credit history, making them a popular option for home-based businesses.
- SBA 7(a) Loan. SBA 7(a) loans can be a good option for entrepreneurs with special financing requirements but do require the borrower to demonstrate a need for the loan, as well as a clear ability to repay it. Specific eligibility requirements for 7(a) loans can be found here: https://www.sba.gov/partners/lenders/7a-loan-program/terms-conditions-eligibility
- Business Credit Cards. If you have trouble securing a loan for your home-based business, you may consider using a business credit card. A business credit card can be a flexible and convenient way to get the funds you need and can also help to build your business’s credit. However, you should be aware of the interest rate on the card, as well as any potential fees associated with it.
- Purchase Order Financing. Purchase order financing is used by businesses that sell products to commercial customers or retailers. This type of financing is essentially a cash advance that allows businesses to get inventory produced before they’ve been paid by the retailer that they’re selling to. A business secures financing from the funding company by showing a signed purchase order (PO). The PO provides proof of future income, so credit history is less important during underwriting. The funding company then provides the funds directly to the manufacturer. This type of financing is not typically offered by traditional banks, but there are many online companies that specialize in it.
- Invoice Financing. Invoice financing allows businesses to use their accounts receivable to secure immediate payment. A business sells its accounts receivable to a third party at a discounted rate compared to what’s due. The business doesn’t collect the full amount that they would, but they can get payment faster. A home-based business with a large accounts receivable may consider this financing option.
- Crowdfunding. Crowdfunding is a way to raise money from a group of peers or interested investors. There are many crowdfunding websites out there that make it easy for small businesses to create a “campaign” and seek funding. If interested in exploring this route, it’s important to fully vet the crowdfunding platform, associated fees, and terms, before signing any type of contract or agreement.
If you’re the owner of a home-based business, don’t be discouraged from looking for suitable financing. BankFive’s dedicated Business Banking Team is ready and willing to help you navigate your borrowing options and point you in the right direction. Don’t hesitate to contact us today!