There are some businesses that can be started on very little capital – if you are planning on working online, then all you will need is a computer and a fast Internet connection.
However, most other businesses need at least some working capital to get started. With this, you will purchase all the equipment, the starting inventory, insurance for your business and office supplies. You will also have to pay yourself as you will have living expenses, even if your business may not be making any profits as of yet.
There are better ways of funding your home-based business than reaching into your retirement fund.
You need to estimate your expenses
However, before you apply for funding you need to estimate your expenses – over the short term and the long term.
You need to understand what exactly you will be spending on and how much you intend to spend. If you a clear idea of your expenses, chances are you will not over spend by a large amount.
Do your planning by working on a business plan
The best way to do all this planning is by working on a business plan. If you are going to apply to banks or other creditors for a business loan, most of them will ask you for a business plan.
Even if the money is coming from your family or your friends, it is a good idea to have a business plan, as it will help you thrash out all the financial details and help you figure what kind of start-up capital you will need.
A business plan in fact acts as a blueprint for you to follow – it will not only help you to estimate your financial requirements for the next few years but also tell you when you are overshooting the estimated expenses.
With a business plan in hand, and a clear idea of how much capital you will need, you can now explore various options for obtaining funding for your business. Here are some popular sources of funding open to you.
- Commercial Banks – Taking loans from these banks is attractive because they do not insist that you turn over any kind of company control or equity to them.
On the other hand, if your business does not make a profit for some time, it may be difficult to repay this debt. Also, if you do not have any kind of business experience or solid collateral, banks may not even grant you the loans. Of course, if you are looking for a loan of 100,000 or less, you could get an unsecured loan provided your credit history is good. If you have any personal assets, you could also obtain secured loans up to a certain amount.
- Small Business Administration - The SBA actually does not loan any money directly. Instead it just guarantees up to 75 percent of individual loans made by private creditors – loan amounts can be as high as 750,000.
The only catch is that businesses must show that they can obtain conventional funding as well. In addition, business owners are required to provide personal guarantees for the SBA loans – they also need to show through the cash flow statements in their business proposal, that the business has the ability to earn enough to repay the loan. If you contact a commercial bank, they may also offer you information about SBA loans.
- Home Equity Loans – If you are a home-owner, getting a home equity loan is one of the most cost-effective ways of raising some capital, as they offer some of the best interest rates.
On the other hand, both you and your family may feel strongly about risking a family home in your business venture. Take into account all the risk factors and see if the benefits outweigh these risks.
- Credit cards – If you need immediate cash to make a few purchases for you business, credit cards are a quick and easy alternative. However, credit card interest rates can be fairly high and there is no way you can use that as a form of long term financing option.
If you plan to use credit cards on a regular basis to make all cash payments, shop around for the best deal as far as the interest rates go. In fact, many young entrepreneurs roll over the debt from one credit card to another, as most make introductory, low-interest offers that go on for the first six months!
- Leasing Equipment - It is never easy for a start-up business to have cash to purchase many of the equipment needed by the business.
The solution is to go in for equipment lease financing. This kind of financing not only gives access to many kinds of equipment that businesses need like trucks, cars, fax and telephone machines, computers and copiers, but also ensures that your cash or credit lines are not tied up.
The leasing option does not quite get you cash but it does make you spend less. Of course, many experts believe that over the long run, leasing may prove to be more expensive to your business. However, if at the beginning, cash flow is of serious concern, you are better off leasing the equipment.
Before you make other plans for your home-based business, you should make sure that you have a business plan in place and that you know what your financial needs are going to be in the immediate future.
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