In this age of pandemic and economic turmoil, a good way to financially thrive is to start a home-based business. You get to be your own boss – right at the comfort of your safe abode. Talk about being productive – without missing your children’s biggest milestones in life.
But as with any business, you need to have a capital to run your home-based enterprise. If it’s your first time to apply for such a loan, then you need to follow these tips on how to finance your home-based business:
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1. Prepare a copy of your credit report.
If you want to improve your chances of getting a loan, then you need to have your credit report at hand. Many institutions rely on this to determine the applicant’s ability to pay off a loan.
Generally speaking, you need to have a FICO score of at least 720 to get a loan.
Should you have problems such as charge-offs, bankruptcies, judgments, excessive trade lines, and maxed-out credit lines, these will surely come as red flags to the lender. If you want to have a better chance of getting a loan, you need to eliminate these issues before applying.
2. Analyze yourself.
Before you file for financing, take a good hard look at yourself. Do you have the positive attributes that would qualify you for financing?
Remember, if you have any of the following, then you have a better chance of getting that loan:
- Assets such as your own house and other investments
- Angel investors or venture capitalists
- Cash flow from a stable job or another type of business
3. Do your research.
Thanks to the internet, you can do your pertinent research without leaving the comfort of your own home. All you just need to do is log on to the Small Business Administration (SBA) webpage. While it’s not in charge of lending per se, it works with private institutions in providing financing to small business owners.
Once you’re on the website, take a good hard look at its guidelines. These will help you navigate well through the path of getting an SBA microloan.
4. Get ready with the necessary documents.
While lenders are bound by the SBA mandates, they will always find a way to scrutinize your application.
To decrease the waiting period – and increase your chances of getting a loan, make sure to have the pertinent documents ready. These include bank statements, including a report on why they should finance your home-based business.
5. Choose the best type of loan.
Now that you have your documents ready, you can start applying for a loan. You must remain patient as you wait for the results. It could take a couple of weeks before you get a response from the lender.
Here are the different ways to finance your small business:
a. SBA Microloan
Should you go with this, start by applying to 2 to 3 SBA lenders. When you fill out the forms, you need to be ready with a set loan amount. The maximum is usually $50,000.
You might not get your desired amount on the first try, and as such you need to be flexible about this. Lenders may ask you to place an asset as collateral, especially if it’s your first time getting a loan.
What’s great about an SBA Microloan is that it comes with business training. Not only do you get financing, but you earn the skills and knowledge necessary to grow your business as well.
b. Home Equity Line
This loan, which is usually offered by banks, puts your home in equity for business purposes.
While they have cheaper terms compared to other forms of loans, they are deemed to be riskier. As your home is literally on the line, you stand to lose it if your home business fails to take off.
c. Peer to Peer Lending
As the name suggests, this involves borrowing money from other individuals. You borrow the money yourself, which you use to fund your business.
Technically speaking, peer to peer lenders do not ‘loan’ to businesses. Although this is the case, it’s a good source to get as much as $35,000 in capital.
d. Credit Card
If you want a fairly easy way to finance your home business, then you could borrow money from your credit card.
Like a home equity loan, this comes with risks. If you are unable to pay the terms, you will end up destroying your credit score. Failed payments may lead to legal headaches as well.
e. Small Business Factoring
If you can’t afford to wait for as long as 60 days for the payment, then you should consider small business factoring. You get funding from the factoring company, which is the one who ends up waiting for the payment.
What’s great about small business factoring is that it’s easy to get. The financing line is also fairly flexible, and as such it could help grow your business in the long run.
Congratulations! You finally got approved for a loan. But before you get all happy and accept it, you need to go back to the old drawing board. Evaluate the amount to see if it meets the needs of your home business. Is it enough to fund all the necessary products or items for your small enterprise?
If not, take another look at your business plan. Is it still conducive for business, or has it been explored by another business owner? Is it still profitable as you drew it up to be? Remember, you don’t want to be on the losing end of this. Such is especially the case if you made a home equity or credit card loan.
Having a loan means that you need to have money to pay for the terms every month. If the revenues for that venture as not as well as they used to be, then maybe you should consider drafting another business model.
In a Nutshell
Applying for a loan is a new venture. It can be quite terrifying and confusing for a prospective business owner. If it’s your first time to apply for financing, then you need to be careful. With that being said, make sure to follow the above-mentioned tips as they can help you get that loan that will start (and grow) your home business.