Financing Options for Your Home-Based or Small Business

While most of home businesses require a very low start-up cost, there are still a lot of home based businesses that require some start-up capital to use for working capital and to purchase inventory and equipment.

Most people would start with their own personal savings. However, the problem starts when your savings are not enough or you may not have any savings at all but you have a great business idea that presents a lot of opportunities or potential. Others may have to approach close friends or relatives to see if they are either interested in loaning you the money or becoming an investor and own a portion of the business.

There are a lot of ways that you can finance your home based business.

Below are the five most common financing sources:

Retirement Funds

Some retirement plans have programs where you can utilize your retirement funds to finance your business without incurring the early withdrawal penalties. Self directed IRA and self-directed 401ks are two of the most common programs available.

Another alternative would be borrowing from your 401ks. The maximum amount that you can take out is 50% of the value of the fund but it is capped at $50,000. In addition, the loan can be repaid for up to five years. The interest rate is very low and the approval process is very simple since you are borrowing your own money. However, some plans require you to be employed with your current employer since repayment will be withdrawn directly from your paycheck. However, the disadvantage with going the loan route is if you default, the balance on the amount of money borrowed will be treated as distribution and you will have to pay early withdrawal penalties and income taxes on those.

Commercial banks

Commercial loans are the most common choice for majority of home based business owners. However, this is sometimes very difficult to obtain especially when banks look for individuals who has been in business for quite some time, has a good credit history, and business has a good cash flow.

Moreover, commercial banks may loan you the money if you provide collateral using your personal or business assets. If you have an excellent credit history, some banks may even offer you unsecured loans for up to $100,000.

Small Business Administration

The SBA is a federal agency that aims to help small businesses raise capital by guaranteeing the loans made by private banks. SBA is not a lender and it does not loan the money directly. However, the business must first provide proof that it cannot obtain financing through conventional ways.

In addition, business owners must personally guarantee SBA loans and must also show sufficient cash flow from their business to pay back the loan.

Home equity loans

One of main advantage of home equity loans is that it offers very favorable interest rates and terms compared to any other alternative.

Because the house is used as collateral, the owner can get the lowest loan rate and longer terms to pay (such as 15 to 30 years). However, the main drawback of going this route is that if you are unable to repay the loan, you run the risk of losing your home. You should really consider the risk involved before deciding on going this route.

Credit Cards

As with commercial banks, if you have an excellent credit history, a lot of credit card companies may offer you unsecured credit limit of up to $100,000. You can use this to purchase your equipment and supplies or even make cash advances. However, credit card interest rates are usually higher that regular loans and it is even higher if you take cash advances. Because of its high interest rates, it is never a good idea to use this for long term financing.

Photo credit: City of Sandy Springs