What Is the Best Way to Finance a New Home Based Business?
Having a great business idea is one thing. Having the funding to pull it together is another. In many ways, finding the money to make your business dreams a reality is the hardest challenge you will face, at least initially. Fortunately, there are a number of options available for obtaining the funds that you need.
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Instructions
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Write a business plan. Having a detailed business plan is one thing that all successful companies have in common. This plan should detail the market in which your business will operate and how you intend to penetrate that market. Include an operating budget to spell out how your financing will be distributed, and include a firm sales plan to demonstrate how you will be able to earn the money back.
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Evaluate your personal finances. Most home-based businesses are funded from the individual savings of the person starting the business, or from loans made by family and friends. Even if you plan to obtain outside funding, if you will be working on this venture full time and not working for another employer, you will need to make sure you have enough funds to cover your household living expenses while the business starts up. Knowing where you stand financially will point you in the right direction.
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Use your credit cards to finance your home based business. Although you will pay higher interest rates on your credit cards than you would pay on a loan, the funds on credit cards are immediately available. Many people use cash advances on credit cards to launch their venture, then repay those debts when a business loan is acquired or when the business generates revenue.
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Get a loan from the bank. It is better to use a bank that you have an established relationship with, such as the bank where you have a savings or retirement account. Even if your home based business is new, you can get a personal loan for up to $100,000 based on your individual credit history. This is usually ample funding for a new home based business.
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Obtain a home equity Loan. This type of loan will allow you to secure funds equal to a percentage of the funds you have paid into your home. This type of loan typically has the best interest rates of any type of loan available, but it also means putting your home at risk. Calculate the risks and how successful you can realistically expect your business to be, and weigh all available options before selecting this type of loan.
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Borrow money from your retirement account. You can not withdraw money from your IRA early without incurring a penalty, but you can give yourself a loan from the account. You will have to pay interest on the loan, but in most cases the interest is added to your account. This makes it an attractive proposition when compared to paying interest to a financial institution, but many people remain uncomfortable with borrowing from their retirement. This is usually best is reserved as a last ditch effort, and only for an amount that you are confident of being able to pay back.
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Apply for a loan from the Small Business Administration. The SBA does not make loans directly, but will provide security for banks to issue a loan to you. There are various types of SBA loans that apply to home based businesses, with loan amounts ranging from $35k to over $1 million. To qualify for an SBA loan program, you must demonstrate that you are unable to obtain financing through alternate means, and must also demonstrate that you will have the ability to repay the loan.
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Tips & Warnings
You can also get financing from a private investor. This is usually not the case for most people. Those who do attempt to find a private investor are usually partnered with a venture capitalist who will expect to own 70% of the venture in exchange for their funding.
Resources
- Photo Credit Paul Worthington, Flickr.com Creative Commons License
