Options for Financing Your Home Business

Covers various options for financing your home business like SBA loans, Angel Investors and Venture Capital.

by Elena Fawkner

Okay, you've decided to start your own Home Business. You've got enough experience and knowledge to initiate it, but you're just a little short of the cash needed to actually do it. What to do? Unless you have rich relatives that are more than willing to part with some of their money, or a large nest egg that's you've put aside for such use, or even a really nice friend who happens to be the manager of your local bank, you're may have to finance your business start-up costs. But first, you have to know what's out there and the different kinds of loans that are available to small businesses.

There are several different types of loans that are common for those in your situation. This article will briefly go over each of them.

Option #1

One common type of loan is one which originates from the U.S. Small Business Association, called an SBA loan. While these are only available to small businesses in the Unites States, there are programs like these in other countries as well. You'll have to conduct some research to find those. At any rate, the SBA helps people start their own businesses by guaranteeing loans made through private banks and lenders. Doing so drastically reduces the risks that come with a new business, which cause no little amount of trepidation among traditional lenders, so they are more willing to grant your loan request since they won't lose their money.

While your local bank may breathe a sigh of relief, you are still required to guarantee the loan through the SBA, so you will have to offer some sort of collateral to ensure that your loan is repaid. This might mean your home, your car, or other personal assets. Of course, if your business does well, the SBA 'loan' can be paid via your cash flow. If you have good management skills, a good character and you either have the collateral or equity in your business already, so much the better.

Who is eligible for a SBA? Any 'for-profit' business - now, this means that your business must have a potential for earning money, even if you haven't earned a penny yet. Your business must also be in the United States and there must be some equity in the business, if possible. You should also be prepared to provide an alternate method of financial revenue to start, including personal assets if necessary.

The SBA charges fees for each approved loan, such as servicing fees and a guaranty. For example, the guaranty for a loan of under $150,000 or under is roughly 2% of the guaranteed amount. If your loan is over $150,000, but is below $700,000, the rate is 3%. Over $700,000 and the rate is 3.5%. In addition, an annual service fee of 0.5% is calculated into the current loan balance.

If the borrower meets the eligibility and credit requirements of the SBA, it does guarantee up to 85% of loans that amount to $150,000 or less and for loans over that amount, up to one million dollars, they guarantee up to 75%. The interest rates are decided upon between the lender and the borrower. The SBA also imposes stipulations on how you use your loan proceeds. Although proceeds can and should be used for most business needs, you can't use loan proceeds for financing floor plans; pay off existing debts or making payments to business owners or for late taxes. You can use the loan proceeds to buy real estate to carry on your business, to construct or renovate a location, to purchase furniture and equipment and inventory.

Generally, loans must be repaid within 7 years, but fixed asset loans must be repaid by the end of the economic life of the assets, but not to exceed 25 years. Get online and check out http://www.sba.gov for more information.

Option #2

'Angel' loans are another loan option. Actually, these are more commonly called 'Angel Investors'. Angel investors are nice people who not only want to offer a helping hand to fellow entrepreneurs, but they also anticipate the higher returns that go hand in hand with taking risks. Angel investors help to fill in gaps that may exist between the start-up phase of a new business and the ability to qualify for capital. For the most part, angel investors are prepared to shell out anywhere between $150,000 and $1.5 million.

'Angels' fund thousands of companies each year, and the SBA estimated that there were over 250,000 of these people in the United States alone. So, how to contact one? Well, it isn't easy, but it can be done if you're patient and determined. The key is to talk to business associates and other professionals and sooner or later, you'll run in to one who knows someone who knows… you know how it goes.

You may also opt to investigate an internet based listing service for securities opportunities for small businesses at http://acenet.se.unh.edu/pub/.

Option #3

Venture Capital is another option, but if you go this route, you'll be running with the big dogs. With venture capital, you're talking about millions of dollars as opposed to thousands of dollars, so this is not an option to many start-up businesses. Firms in this area are looking for their return in capital appreciation rather than interest like banks do. And what they particularly want is a return in the 500-1000% range. And before you get too excited, venture capital firms are still wary of internet based businesses. Still, if you have a good business plan and can show a strong potential for growth, going this route may be an option for you long term.

One of the more common concerns regarding financing for most is that you are required to relinquish some control over your business, because in return for the risk investors are taking in your business, they want some portion of control over how it's run and in some of your business decisions. Don't be surprised if they ask for a seat on your board, for example. Just try to remember that it's in their best interest for you to succeed as well, which may make it easier for you to give up some of the control to keep them happy.
An easy way to find venture capitalists is to purchase a copy of 'Pratt's Guide to Venture Capital Sources', which contains a listing of over 1,000 sources. It includes names, contacts and areas of interest. Don't forget to utilize the internet for information as well.

These are just a few suggestions. Research everything and take your time doing it. This is not the time to rush. Don't overlook opportunities close to home, and always try family funding options first. If you're positive your business will be a success, you may want to start with this route, and then venture into outside sourcing possibilities as you go on. But if you're at all uncertain about the success of your home business, you certainly don't want to burden your nest egg or that of other relatives or friends. Still, relatives are apt to be a little more patient for the repayment of their loans than your government or other public funding source. Just take your time, do your homework, and you'll be able to make wiser choices when understanding the pros and cons of financing your home based business.

About the author:

Elena Fawkner is editor of A Home-Based Business Online ... practical ideas, resources and strategies for your home-based or online business. http://www.ahbbo.com

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