Some potential entrepreneurs have big dreams from the start. They have a great business idea and they really want to bring it to fruition, but sometimes the start-up capital required for such a business exceeds their financial possibilities. In such a situation, there are only two solutions: starting from the bare minimum, hoping that the business will take off and generate the revenues needed for re-investing in the business, or getting a loan.
Now, we know that so far we’ve promoted home-based business ideas which you can open with a minimum upfront investment. However, it is time to recognize the fact that some business ideas have the potential to grow into very successful companies and some entrepreneurs have an extremely creative and profitable idea – but these types of businesses need a significant initial investment in supplies and equipment.
Therefore, today we will discuss various loan options for home-based business owners. We will guide you, first of all on the basic requirements before you start applying for any kind of financing option.
The Application File for Home-Based Business Owners
1. Credit report – before you start considering any kind of loan, you need to know what your credit score is. For maximum accuracy, you should apply to all three credit bureaus for your report: Equifax, Experian and TransUnion. In order to qualify for a loan, your credit score should be at least 600.
2. Business plan – your business plans should contain a description of the products and services you will provide, what the potential market segment who would be interested in purchasing the products or services is, and financial projections for the first 6 months/1 year/2 years.
3. Collateral – as a startup you cannot use the assets of your business as collateral for your loan (because most likely, you do not have any yet). The only other options are: your car, your house, or your retirement fund.
Financing Options for Home-Based Businesses
1. Rollover for Business Start Ups
You can use this option if you have at least $50,000 in your 401(K) account. The main benefits of this type of loan option are:
⦁ You can take from your retirement fund without penalties or interests to pay;
⦁ You do not accrue debt which needs to be paid off;
⦁ If your business takes off, your retirement fund can grow beyond your usual contribution abilities.
The downside to this type of financing option is the fact that you will lose every cent in your retirement fund if your business fails.
2. Microloan from Nonprofit
This loan option is quite accessible for new entrepreneurs in terms of qualifying conditions. You need to have a credit score of at least 525, with no recent bankruptcies or foreclosures recorded on your credit history, and have reasonable interest rates. You can borrow up to $50,000 – a sufficient amount for a home-based business – but you need to be patient. The usual application process takes up to one month before you get the approval for the loan.
3. SBA Loan
The banks and financing institutions affiliated to the Small Business Administration offer entrepreneurs’ loans of up to $5 million, with the following conditions:
⦁ A credit score of minimum 660;
⦁ A down payment of 20% of the borrowed amount;
⦁ Proven experience in business or management;
⦁ Bringing business or personal collateral.
4. Credit Card
Surprisingly, most home-based business owners have found this the simplest and most affordable way of financing their home-based business. The APR is between 10% and 20% and you can borrow up to your credit limit (as determined by your credit score). However, if you are not very careful with your finances and the repayment of the amounts you use, it is quite easy to see your debt piling up.
Before you make any major decisions concerning financing your business, you should always consult with your spouse and the rest of your family. After all, your decision can affect their whole future.