Money And Finance - How To Secure Funding For Your Home-based Business
By Anthony Samuel
Most home-based entrepreneurs self-finance the founding of their businesses. Home-based business owners are independent, and most dislike the notion of being beholden to a lender. However, there comes a time in the life of most successful businesses when self-financing isn't enough. Perhaps you have an order that you can't fulfill because you lack sufficient capital to purchase the supplies. Or maybe your sales volume is growing so fast that you're unable to re-supply while waiting for your accounts receivable to come due. Either way, if you need outside financing, there are plenty of options.
The Small Business Administration
The Small Business Administration (SBA) is an agency of the federal government, and the leading facilitator of small business loans. Contrary to popular belief, the SBA doesn't usually loan money - it simply guarantees the repayment of the loans. This gives traditional lenders (banks and credit unions) a greater incentive to make small business loans, since if you don't pay them back, the SBA will. But that doesn't mean that you're off the hook - far from it. If you fail to repay an SBA-backed loan, the federal government will be your new creditor, and that's not a creditor you want to have.
Types of SBA Loans
The 7A Loan is the SBA's most common loan program. Funds from 7A loans can be used for almost any business purpose, including the establishment of a revolving line of credit or the purchase of inventory. loans are typically for amount in excess of $50,000 with a maximum guaranty of $1.5 million. The federal government does not permit lenders to impose any balloon payments, points, or application fees on 7A applicants.
The 504 Loan is a safer, more secure loan for lenders to make. Funds from 504 loans can only be used to purchase securable assets such as property, plant, and equipment. 504 loans cannot be used to consolidate debt, establish a line of credit, or even to purchase inventory. Furthermore, at least one job must be created or maintained for every $50,000 worth of 504 loan funding. Most home-based business owners have no interest in building factories or buying bulldozers, so the 504 loan is probably not applicable.
A great loan program for home-based business owners is the MicroLoan Program. This program provides loans of up to $35,000, mostly to start-up or recently formed businesses. Minimum loan amounts are much smaller, and the average loan is for just $13,000. MicroLoans must be repaid within a maximum of six years, and owners of home-based corporations will be required to sign a "personal guarantee," holding them personally liable should their corporation default on the loan.
Alternative Sources of Financing
Thanks to the internet, there are new alternatives to financing through traditional banks. Some reputable web sites connect individual lenders and borrowers without the middle man. Using these sites, you can post a loan listing along with pictures and information about your business. You set the maximum interest rate you will pay, and prospective lenders can decide whether or
not they're interested in funding you. Lenders are able to see a summarized version of your credit report, and you may also be required to submit some form of income verification. If more than enough lenders are interested in funding you, then they bid down your interest rate and save you money! Once your loan is funded, the amount is deposited in your checking account, from which your monthly loan payments is withdrawn. All loans are for three years, and are fully amortized - no balloon payments, no surprises, no catch.
If you have a grandparent or great-uncle who would like to give you a loan, the internet provides great alternatives for you, as well. Web sites specializing in family loans help eliminate stress by drawing up legally binding documents, and then administering the loans. This means that your monthly payments are withdrawn from your checking account and deposited into your lender's. There won't be awkward moments at family get-togethers - these sites do the dirty work; sending the payment reminders and collecting the payments.
Lack of access to capital is the #1 killer of small companies, but as you can see, there are multiple sources of financing for growing home-based businesses. Don't let a lack of funds stunt your company's growth. The money is out there if you just know where to look.