Financing a Start-up
Four Funding Opportunities Your Home-based Business Should Consider
As you grow your home-based business, you may find yourself needing additional funds. But there are dozens of different types of financing available to small businesses and finding financing can feel over-whelming. Don’t let that stop you from getting the capital you need to grow your business.
Here are four funding sources your small business should consider, and tips from entrepreneurs who have used them successfully:
Business Credit Cards
When Sandeep Kumar Aggarwal started his online concierge service, The World Concierge, from his home in West New York, NJ he needed funding to purchase travel packages he would resell to clients. He received financing from two sources: a bank loan and a business credit card. The business credit card he chose allowed him to pay over time: “I was able to get the funds right away and start using the money to purchase the goods I needed to run my home business,” he says.
A business credit card is one of the easiest ways for a business to get funding. Most credit card issuers base the decision on the owner’s personal credit, and will consider income from all sources – not just business revenues. That means these cards are often available to start-ups. As a bonus, most business credit cards report to business credit reporting agencies, which means they can help build business credit.
Sandeep’s Success Tip: Always make your credit card payments in time; it is crucial. Keep your credit score as high as possible. The higher your credit score, the higher the loan amount you will receive and the lower your interest rate.
Debra Cohen, founder of Home Remedies of NY, Inc. launched a business that prescreens and refers local home improvement contractors from her home in Hewlett, New York. She turned to retirement savings to get started, borrowing $5000 against her husband’s retirement plan. “While I felt it was a bit risky, I evaluated a lot of options and the interest rate (3%) and payback terms (10years) were the best I could find,” she explains. “I set a goal of paying it back within a year and actually was able to do it in 6 months.”
Her gamble paid off. Not only did her business grow, but she was subsequently able to help more than 300 individuals launch home-based HRN businesses nationwide. She noticed that many of those entrepreneurs were turning to their credit cards to get their businesses off the ground. “I also started accepting credit cards and offering 0% financing because I saw how difficult it was for most people to secure financing to start their businesses,” she says.
Borrowing from personal savings and retirement involves risk, so Cohen was right to be cautious. After all, starting a business is risky, and if your efforts don’t pan out, you could lose the money you’ll need to live on someday. Make sure you have a solid business plan and try to test the waters before you risk too much capital.
Debra’s Success Tip: As a business owner, you need to think creatively and be determined and that starts with financing. If you need a small loan and traditional financing isn’t an option, consider selling personal items, borrowing against your home, taking a loan from friends or family or launching the business with a partner.
The three co-founders of Pip & Grow, which introduced a durable, portable and eco-friendly European-style baby box to the U.S., work from home in multiple cities: Charlotte, NC, Portland, OR, and Sarasota, FL. Although sales were growing, they needed additional capital to launch new products. But looking for funding was frustrating.
“Because we were a small start-up, we didn’t even qualify for the majority of funding options out there,” says co-founder Lauren Hughey. “Even the education process of the different kinds of funding available was daunting,” she adds.
The three entrepreneurs broadened their search and struck funding gold. “We pursued a grant from SCORE and won!” says CEO & Founder Amber Kroeker. “It was exhilarating. The SCORE Award helped fund our company which resulted in some amazing growth. Not counting the incredible networking opportunities.”
Small business grants offer money that does not have to be repaid. And unlike venture capital or angel funding, founders don’t give up equity in their business. But finding – and winning – grants can be challenging. There are a variety of organizations that give grants, ranging from the federal government, to private organizations, to grants designed to help underserved entrepreneurs such as women or minorities. Cast a wide net as you research small business grants (visit Nav.com/grants) and carefully follow all instructions in the application.
Lauren Lloyd’s Success Tip: Do your research and get a SCORE mentor to help you through it. (Tip: Find a free mentor through the SBA locator at SBA.gov/tools.)
Josh Elledge has been a home-based business owner for more than two decades. He’s founded multiple businesses, and he and his entire team have always worked from home. Recently, he sought funding for his Orlando-based business, UpMyInfluence.com, which increases authority, influence, and sales for clients.
“I did a lot of research and talked to a lot of experts,” says Elledge. “Terms and interest rate were the most important to me. I didn’t want expensive money; I’m not desperate,” he says.
UpMyInfluence was able to get an SBA loan, which is often considered the gold standard for small business financing due to low interest rates and favorable repayment terms. SBA loans are made by a variety of lenders around the country; a portion of the loan is guaranteed by the Small Business Administration if the borrower defaults.
The downside of SBA financing is that these loans take time and effort. “We probably worked a solid 30 days to complete the application process,” Elledge explains. But it’s been worth it. This funding “put us in a position for increased growth that far eclipses what we are on the hook for,” he notes.
Josh’s Success Tip: Don’t put everything on your personal credit. Avoid that as soon as possible. Create a minimal viable product, get some revenue coming in and if your credit is good, get a business loan.
Increase Your Approval Odds
There are three main criteria that many lenders consider when evaluating applications. Use the following strategies to help improve your chances of getting approved:
- Time in Business
Start-ups often have a harder time getting funding. Lenders are often more willing to finance businesses that are at least two years old, so establish an official start date for your business as soon as possible. Incorporating your business as an LLC, S or C Corp is a great first step. But even if you decide to operate as a sole proprietor, file a fictitious name registration (also know as a “DBA”) with your state. Keep in mind, however, that until you create a business entity your personal and business financing will never be truly separated.
Some lenders have specific minimum revenue requirements. It’s essential that you open a business bank account and use that exclusively for business income and expenses. That way you’ll be able to document revenues if the lender requests them.
Some lenders review the owner’s personal credit reports and scores, some review business credit, and some – like many SBA loans – evaluate both. Business owners can get their personal credit reports for free each year at AnnualCreditReport.com, the government-mandated site for free consumer credit reports. In addition, there are more than 150 places where you can monitor your credit scores for free located at Nav.com/free-scores.
Business credit reports and scores are compiled by companies such as Dun & Bradstreet, Equifax and Experian. Unlike personal credit reports, however, there is no law that mandates free business credit reports. Nav.com gives business owners the ability to check and monitor reports from each of those three agencies for free.