Thursday, September 6, 2018

How to Get a Loan for a Home-Based Business, Both New and Existing

Understanding your business financing options for any kind of company can be challenging. But if you’re looking to get a home business loan for a company operating out of your house, it can be even harder. As small business lenders evaluate your company, they’ll be looking for essential elements including time in business, your assets, and business credit history. Not every home-based business has these.

Just because your home business might not look the same as a company with its own space doesn’t mean that you’re out of options. Figuring out how to get a loan for a home business might require getting a little creative or right-sizing your expectations. The process for getting home business loans is a bit different, too, but not entirely unique.

We’ll go through all you need to know about a home business loan, the reasons they’re a bit trickier to secure than traditional financing, what your borrowing options are, and what to expect from the loan application process. Plus, we’ve thrown in a few tips on how to make the entire home business loan process simpler.

Why Home-Based Business Don’t Have as Many Traditional Business Financing Options

1. Your company is too new.

Don’t take this one personally—new businesses of all stripes have a hard time securing small business financing.

Many small businesses begin as home-based companies. It makes sense—home is usually the simplest place for a company to start. You have an idea, you casually build it from your living room (or dedicated home office for business tax breaks!), and it often scales into a “real” company from there.

Although it’d be great to get business capital to help you grow into a bona fide company—after all, you often need money to rise to the next level—business lenders will be looking for a track record of some consistent revenue to make sure you’re a low-risk borrower. If you can’t show that your business is successful, that it gets paid regularly by clients, that it has sufficient operating capital to cover loan payments, and that it has a good track record of paying back borrowed money, then it can be much harder to get approved for a loan. When you’re new in the game, it’s tough to show lenders that you’re a safe investment.

2. You don’t have many assets.

It’s not easy to build a business from scratch by renting or buying commercial space first, and then creating a business plan afterward. Or, if you’re working in creative or service-based fields that don’t require you to have an established physical presence for your company, it’s even less likely that you’ll need to seek out an office outside of your own house. But what might be a benefit for you as a lightning-fast commute from your bedroom to your office might be viewed as a disadvantage to a business lender.

Odds are that your home business doesn’t have a ton of overhead: You’re not renting a warehouse, you probably don’t have much (or any) inventory, and you probably don’t have a ton of machinery sitting in your basement, either. This is great for your operating costs, but it doesn’t help lenders determine how good you are at paying off leases, equipment financing, or rent on your company’s space.

Not having much equipment also means that you can’t offer as much collateral to your lender. Collateral is often a vital component of the loan approval process. Lenders want to make sure that they can mitigate the risk of losing money, so they require borrowers to pledge that they’ll give up something about equal to the value of the loan if you’re unable to repay what you’ve borrowed.

Most lenders prefer to lend to companies with a track record of successful operation, enough collateral to secure a loan, and a demonstrated history of paying back loans. But that doesn’t inherently disqualify home business loan candidates from funding their company. Rather, it means that you’ll work with fewer options than you might otherwise.  

home business loans

How to Get a Loan for a Home-Based Business: 6 Best Options

Although your approach might have to be a little different, you have several options for funding a home business. Picking the right one depends mostly on what you intend to do with the loan itself.

For the most part, you’ll be best off with online lenders over bank loans, which have very stringent requirements for borrowers that many home-based businesses will have a hard time meeting (especially new operations). Other, less conventional loans might work for you if you need general funding to get your home-based business off the ground.

But there are plenty of avenues for you to explore, regardless of why you’re borrowing. Here are the six best loans for home-based businesses:

1. Best SBA Home Business Loan: SBA Microloan

Small Business Administration (SBA) Microloans are a great option for entrepreneurs with good personal credit and a solid business plan. These loans provide up to $50,000 for small business owners to purchase inventory and equipment, or to provide the working capital required to get a company off the ground. These are part of the government-backed SBA loan program, so they come with favorable repayment terms and some of the best interest rates you can score—especially as a new business owner.

SBA Microloans are a great option for all small business owners, but can be particularly helpful for underrepresented entrepreneurs, such as women, minorities, veterans, or low-income applicants. Candidates with a limited personal credit history are also encouraged to apply for SBA Microloans, as they require less of a track record than other loans (which most newbie entrepreneurs might not have). If you have average credit, you’re also more likely to be approved for an SBA Microloan, which can make this an appealing option for would-be business owners who are working to build better credit.

As a another advantage, these loans come with fewer restrictions than some of the other home business loan options out there, which means that you have a greater degree of flexibility with how you use the money (as well as deciding if you want to divide the loan total to accomplish more than one goal).

2. Best Home Business Loan for Cash Flow Crunches: Invoice Financing

Home-based businesses with steady customers and recurring invoices might also want to consider invoice financing. Lenders provide companies up to 85% of the total amount of their invoices up front, with the remaining portion paid out after your clients have paid what they owe, minus the lender’s fee.

Invoice financing allows home-based business owners to access the working capital they need to keep their company’s operations humming, and can stabilize cash flow even when clients don’t pay on a consistent, predictable basis. You’ll have to pay your lender for the privilege of getting the sum of your invoices advanced to you before your customers pay up, but many companies rely on invoice financing to release money tied up in accounts receivable. (Hence why this is often called “accounts receivable financing.”)

That said, this option is much easier to obtain than a regular small business loan—particularly if you’re just starting out, don’t have a ton of working capital to show for, or haven’t amassed the kind of revenue that lenders would want to see for conventional loans.

3. Best Home Business Loan for Inventory: Purchase Order Financing

Purchase order financing is another alternative for cash flow issues, particularly if you’re a home business owner who needs capital to fulfill customer orders.

With purchase order financing, lenders can pay your manufacturers if you don’t have enough liquidity to purchase what you need. Borrowers then give the sum of that payment, plus interest and fees, to the lender. This allows you to fulfill orders on time without having to worry about the cost of raw goods outweighing the amount of capital you have to buy these goods yourself.

Say, for example, that your new company receives a ton of orders at once. This can cause a huge cash flow problem for you, as you have to invest in the materials you need to give your customers the items they’ve purchased before you can get paid. Purchase order financing allows you to pay for the goods you need, all while leaving your operating cash intact. This means that you can fulfill your orders without having to turn away customers, which is crucial for new and established companies alike.

home business loans

4. Best Home Business Loan for Low-Risk Investments: Home Equity Business Loans

If you need access to cash and have a high certainty you’ll be able to pay back your loan, you might consider a home equity business loan. With this type of small business home loan, you can use the value of your home to finance your business as a line of credit.

With a home equity business loan, banks assess the value of your house to determine how much money you can borrow. There are drawbacks to home equity business loans, of course. You can lose your home if you can’t pay back what you’ve borrowed, since your house serves as collateral.

Remember: All of the business protections you set up by establishing a business entity like an LLC or an S-corp don’t apply here. That’s why we recommend this as a home business loan for low-risk scenarios; of course you can use this loan for anything, but you don’t want to lose your house if you can’t repay your loan.

5. Best Home Business Loan for New Home-Based Companies: Business Credit Cards

Especially if you’re a new home-based business, you’ll want to begin to get a little creative with your financing options. And business credit cards are an excellent place to start. Not only will you gain access to capital, but business credit cards can also help entrepreneurs build a solid business credit history. That’ll position you well when you apply for a traditional business loan later on.

Foremost, business credit cards are almost universally easier to obtain than a business loan, since you only need strong credit in order to get approved. Business loans, on the other hand, require good credit plus a history of business finances. You generally won’t be able to finance as much with a business credit card (although business charge cards don’t have a limit, you just have to pay them back ASAP!), but you still do get spending power.

The best tool to look to as a new home-based entrepreneur is a 0% intro APR credit card, which will allow you to carry a balance on your card interest-free for a predetermined amount of time (sometimes, more than a year!). Used strategically, you can spend on your card like an interest-free loan. Just be sure to pay off your statement before your introductory period expires so that you don’t have to pay the variable APR that sets in.

6. Best Non-Traditional Home Business Loan: Friends and Family Loan

If business credit cards aren’t a fit due to the amount of money you need or your credit history, and an SBA Microloan is out of reach, you might think about a friends and family loan.

If your loved ones have deep pockets (and deep confidence in you), you can pitch your case for one of these untraditional options. These loans exist entirely outside of the banking and alternative lending world—you’re working solely with people in your own personal orbit.

That means that there’s much more variation in the terms and conditions of a friends and family loan than there would be with an established lender. You might get more generous terms from friends than you would with a traditional lender, and could even have more wiggle room with repayment if you have a rough month or two.

But every financial transaction between family and friends comes with considerable risk. You may end up damaging your relationships with others if your company goes under or if you’re unable to pay back your loan. To make sure things don’t go sour, make sure you draw up a formal contract. (If you want to write off your business loan interest, you’ll absolutely need one, anyway.)

home business loans

How to Make Your Home-Based Business Loan Application as Strong as Possible

Every small business home loan (aside from a friends and family loan), including business credit cards, will require you to put together some version of an application. What the application consists of will vary depending on what borrowing option you pursue.

Some, such as SBA loans, require extensive paperwork. If an SBA Microloan is for you, get ready to provide your personal tax returns, profit-and-loss statements, personal bank records, a solid business plan, and a stated purpose for your loan, among other documents. The SBA loan timeline might be the same as other conventional loans, but you’ll need to build in more time to finish the application.

Invoice financing applications aren’t as involved as SBA loans, but they require a decent amount of preparation as well. You’ll have to provide your credit score, bank statements, a copy of your driver’s license, and the invoices that you want to use in order to obtain funding. Be sure to collect all of this information before you approach lenders, as this will help the process go much quicker.

Others, such as business credit cards, will likely only need your personal credit score before giving you the green light. And, if you’re working to secure a loan from a peer or family member, make sure you ask them what kind of documentation—if any—they’d like to see.

Whatever you need to provide, do your diligence as a borrower and gather your credentials in advance. Make sure you provide your would-be lender with all of the information they need to make an informed decision. Remember that it pays to put in an extra effort during the application process, since you’ll save yourself time (and forestall complications) later on.

When Looking Into How to Get a Loan for a Home-Based Business, Right-Size Your Expectations

It’s not always easy to get a loan for a home-based business, but it’s not impossible either. You’re going to have to demonstrate that your company is a trustworthy borrower, and you might not always have the same amount of material to provide proof.

But as long as you know what you need the money for, choose the right financing product, and identify the right lender, you can position yourself to get the financing required to take your home-based location to the next level.

Be sure to stay on top of your cash flow, your operating capital, and your financial needs. It pays to know exactly what you need and where to get it, especially if you’re going to have to work a little bit harder to secure financing.

The post How to Get a Loan for a Home-Based Business, Both New and Existing appeared first on Fundera Ledger.



from Fundera Ledger https://www.fundera.com/blog/home-business-loans/

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