One of the most important considerations for any business, regardless of size or industry, is whether there’s enough capital on hand to cover expenses and capitalize on growth opportunities. Home-based businesses are no exception.
Therefore it’s little surprise that Fundera’s latest State of Small Business Lending Report lists Auxiliary Home Services (which include home-oriented services like moving services, tutoring, gig economy businesses, and more) at #6 on their ranking of the industries most likely to receive business funding so far in 2019.
Other industries to make the list that can include home-based businesses include Strategy & General Consulting (#4), Online Services (#13), Tax Accounting and Consulting (#18), Travel Planning & Services (#26), and Ecommerce (#31).
Many home-based entrepreneurs have little overhead and thus don’t consider the possibility of taking on debt financing. As the report notes, however, home-based services are actually in an excellent position to qualify for, and use, business loans.
And if the alternative is running out of cash, which (as CB Insights notes) is one of the top reasons why small businesses fail, exploring this option is a no-brainer.
Here are five takeaways on small business lending for home-based business owners:
High annual revenues lead to more successful applications
The number one factor driving loan success is annual revenue, according to the report. Eight of the top 10 industries in the report had annual revenues higher than the overall average business revenue.
This is especially true for the Home Services industry. Businesses in this industry that applied for funding with Fundera reported $1,201,949 in annual revenue, an incredible 37% higher than the overall average.
Revenue is much more important to lenders than profits. If the business has a demonstrated revenue stream with no signs of slowing down, that’s an excellent sign that they’ll have the money necessary to pay off their business loans.
Low profits aren’t a killer
The flip side of this coin tells a similar story. If you have a home-based business and you’re worried that thin profit margins could doom your loan application, don’t be. With a reported average of $95,037 in annual profit, Home Services businesses have 30% lower average profits than all businesses.
Tweaks to the business model—cutting costs, streamlining, being able to buy bulk inventory with your new capital—can help boost profits later. Though some lenders and organizations, such as SBA lenders, will look at your profits, they are more interested in whether you have profits at all (and thus are solvent) than how wide the margins are.
Long business life demonstrates staying power
Another critical factor that lenders consider when reviewing funding applications is how long a business has been around. The average business that applied for a loan with Fundera in Q1 2019 was 7.43 years old—a fairly long lifespan by small business standards.
Businesses in the Home Services field beat even that number, with an average business age of 8.36 years, 13% higher than the average.
Long business life tells a lender that you and your venture have weathered the storms of entrepreneurship. According to the Bureau of Labor Statistics, half of all small businesses will fail within five years. Getting over that hump is an accomplishment, as well as a testament to your business model, tactics, and leadership.
Both kinds of credit scores are important
When applying for a business loan, lenders review both your personal credit score and your business credit score.
It may come as a surprise to business owners that their personal credit score is pertinent to their business dealings, but lenders want to make sure you have a dedicated history of repaying your creditors. A score below the 650-range will make it difficult to find affordable, long-term financing. The lower you go, the worse your options.
Additionally, some people don’t even know they have a business credit score. Many of the same factors go into your business credit score as your personal FICO score—length of credit history, credit utilization, etc.—though they only pertain to your business-related purchases and lines of credit.
Home-based business owners have slightly higher than average personal credit scores, but slightly lower than average business scores. In order to improve your business credit score, make regular payments on your business-specific credit card, pay your bills on time, and dispute any errors and inquiries on your report.
Nearly every type of business loan is possible
There are many different business loan options, from traditional term loans through a bank, to short-term loans through an online lender, to lines of credit, credit cards, and equipment financing.
According to the report, 42% of the businesses in the Home Services industry secured a short-term loan, 32% secured a short-term line of credit, 13% secured a medium-term line of credit, and 6% secured a medium-term loan. Another 6% even secured an SBA loan, a long-term loan with some of the strictest small business loan requirements of any product.
No matter what your need—a loan to cover an expansion, a line of credit to help with the occasional payroll gap, or an elite funding product like an SBA loan for all your working capital needs, being a home-based business disqualifies you from none of it.
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The first quarter of 2019 was a busy one for all businesses—not just Home Services ventures—seeking financing. In this strong economy, expect the trend of businesses seeking extra capital to make improvements, shore up inefficiencies, and survive another day amid fierce competition to continue.
