Understanding business financing options for every company can be a daunting task. However, if you want to get a home business loan for a company that operates out of the home, it can be much more difficult. When small business lenders evaluate your company, they look for important factors including business hours, assets, and business credit history. Not all home businesses have them.
Just because a home business can be different than a company with its own premises, doesn't mean it's not without options.
Figuring out how to get a home business loan can take a bit of creativity or get your expectations right. The process for obtaining a home business loan is also slightly different, but not entirely unique.
Covers everything you need to know about home business loans, why they are more difficult to obtain than traditional finance, what loan options are available, and what to expect during the loan application process.
We've also provided some tips on how to streamline the entire home business loan process.
Do not take it personally. It is difficult for new ventures of all kinds to find funding for small businesses.
Many small businesses started out as home businesses. Home is usually the easiest place to start a business. If you have an idea, the living room (or a dedicated business tax-deductible home office) and from there it often turns into a "real" company.
It is not easy to start a business by making a business plan after leasing or purchasing a commercial space from the beginning. Or, if you're in a creative or service industry that doesn't require you to be physically present at work all the time, you're much less likely to need to find an office away from home.
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.
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:
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.
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. (That's why they are often referred to as “accounts receivables loans.”)
When financing a purchase order, the lender may pay the manufacturer if there is not enough liquidity to buy what is needed. The borrower then repays this payment plus interest and fees to the lender.
This allows you to complete orders on time without worrying that raw material costs exceed the amount of capital you need to purchase yourself.
If you need the cash and are confident you can repay the loan, you may want to consider a home equity business loan. With this type of small business mortgage, you can use the value of your home to finance your business with a line of credit.
With a home loan, the bank evaluates the value of your home to determine how much money you can borrow.
Of course, real estate-backed business loans have their downsides. If your home is collateral and you cannot repay the loan, you may lose it.
Be creative with your financing options, especially if you are starting a new home business. Business credit cards are a great place to start.
In addition to providing access to capital, business credit cards can help entrepreneurs build a solid business credit history. This will help you later apply for a traditional business loan.
First of all, business credit cards are almost always easier to obtain than business loans because you only need strong credit to get approved. On the other hand, business loans require good credit history and business financial history. Usually, business credit cards can't raise that much money (although business cards don't have limits, but you should pay them off ASAP), but still gain purchasing power.
If you can't choose a business credit card because of the money you need or your credit history, and SBA microloans are not available to you, you may want to consider it. Friends and family loans.
If your loved one has deep pockets (and deep trust in you), you can apply for one of these non-traditional options. These loans exist entirely outside the world of banking and alternative lending. You work exclusively with people in your personal orbit.
This means a lot more variation in the terms of loans for friends and family than with traditional lenders. You can get more generous terms from your friends than traditional lenders, and you might even have more repayment flexibility if a month or two is tough.
All small business mortgages (except friends and family), including the business credit card, require some version of the application. The composition of the application depends on the loan option selected.
When considering how to get a home business loan, set your expectations right. Getting a home business loan isn't always easy, but it's not impossible. You will need to prove that your company is a credible borrower, and the amount of proof to provide may not always be the same.
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