While there are some businesses that can be started with modest funds, most home-based businesses require, at the very least, a small amount of working capital. You may need to purchase your own equipment, insurance, and/or inventory to start your business. In the meantime, you will still need to incur living expenses, even if your new business is not making money yet.
There are many ways that you can finance your home-based business. Before you start raiding your retirement fund, however, take some time to plan out what you intend to spend on your new venture. It is a good idea to map out these expenses ahead of time to ensure that you will not get in over your head.
The obvious place to do this planning is in your business plan. Creating a business plan will help you to figure out the amount of start-up capital you will need and to plan for your future financial needs. For more information on this process, check out the AllBusiness.com Business Plan Center and, in particular, the article Financial Plan Section of a Business Plan.
Once you complete your plan, you will have a better idea of the type of funding you will need. Below is a list of the most popular sources of funding.
Commercial banks. Commercial loans are attractive because they do not require entrepreneurs to turn over equity or company control. But paying off debt can be difficult if you are not making a profit. You may not have access to bank loans if you have no relevant experience or collateral. If you are looking for $100,000 or less, you can often get an unsecured loan based on your personal credit history. You can also obtain a secured loan against any personal assets you might have.
Small Business Administration. The SBA loans no money directly. Instead, it guarantees 75 percent of individual loans made by private lenders, up to $750,000. But a business must first show that it cannot obtain conventional financing at reasonable terms. Business owners must personally guarantee SBA loans and must also show cash flows sufficient to repay the loan. Most commercial banks offer information about SBA loans.
Home equity loans. Home equity loans are a cost-effective alternative to other types of loans because they offer some of the best interest rates available. However, you may not want to risk your family home to launch your business venture. Before going this route, you should carefully consider the risks involved.
Credit cards. Cash advances from credit cards are an easy and quick way to gain access to cash. But as a long-term financing method, they can be expensive — credit card interest rates typically run much more than the 1 to 3 percent “over prime” you would likely pay on a bank loan. If you use credit cards, shop for the best interest rate. Introductory “teaser” rates often give you a bargain for up to six months. If you have the time and energy, you can roll over your debt to a new card every six months, taking advantage of a new teaser rate.
Equipment Leasing. Equipment lease financing is an option for many cash-starved businesses. Equipment leases give you access to many types of equipment — computers, copiers, fax machines, cars and trucks — without tying up your cash or credit lines. Although it doesn’t bring in cash, leasing reduces the amount of cash you otherwise have to raise. Leasing generally proves more costly than buying in the long run, but if cash flow is an issue for your company, it is definitely something to consider.
Make sure that you have a firm grasp of your financial needs before embarking on your home-based business. It is easy to underestimate costs when setting up a home-based business, so make sure you clearly separate personal and business home-related costs.