Whether you’re just striking out on your own as an entrepreneur, or you’re a long-established business owner operating out of your home, you are probably dealing with the same issue: getting enough funding to keep the business up and running.
Funding, financing, liquidity, cash in the bank—whatever you want to call it, it’s the lifeblood of your business. When your home is your office, you may not have the same overhead costs as traditional brick-and-mortars, but you’ll still need money on hand to deal with all the expenses that running a business throws at you.
When first starting a home business, it’s surprising how the costs add up. You’ll quickly commit most of your nest egg to the essentials, and if a single customer payment gets held up, or one surprise expense hits your books, you’ll get into trouble. There’s a reason why one study by U.S. Bank found that cash flow mismanagement was the number one cause of small business failure.
To avoid cash flow issues—as well as to take advantage of bulk deals, spring for smart investments, and scale to meet demand—it’s imperative that you learn how to fund your home business.
Let’s walk through the process of why, how, and with what you can fund your business venture, from debt financing to grants to donations from strangers.
Why would you need to fund your business?
Funding, particularly in the early stages of business ownership, is crucial for keeping a small business afloat. The costs to establish your business, market it, and keep it solvent as you experiment with new ways to turn a profit are high.
And the cost of defaulting on a payment, failing to make payroll, or missing out on a great inventory discount? Those costs may be higher still. Funding not only saves you from financial disaster—it helps springboard you to even greater success.
Of course, “funding” is a large umbrella term. When we see mentions of it in the news, it’s usually in regards to some venture capital firm bestowing millions upon a startup unicorn out in Silicon Valley.
But funding comes in many forms and serves many functions. You can receive funding via investments from family or friends; loans from banks or online lenders; grants from government agencies and NGOs; or even donations from strangers.
When starting your home business, one of the first and most important tasks is coming up with a business plan. Your business plan should cover, among other things, your funding needs and how you expect to meet them. That means you’ll need to know what goes into funding a home business, what options are available to you, and how to get the most affordable funding possible.
But first? Understanding why securing funding for a home business is different than for other kinds of businesses.
How funding a home business is different
Almost all businesses, at one point or another, need funding. Their reasons for needing it may differ vastly. And their ability to secure that funding may differ, as well.
When it comes to funding via business financing—such as term loans, or lines of credit—home businesses may be hamstrung by the same thing that made them so easy to start in the first place: the fact that you’re operating out of your home.
Sure, many small businesses start in someone’s kitchen or converted bedroom office. But at that stage, you don’t have a ton of business assets—real estate, heavy machinery, office equipment, etc.—which means you also may not have collateral to put up for a loan.
There are a few other reasons why a home-based business may have trouble securing business financing via a bank or credit union, which will have the best repayment terms and interest rates:
- Your business isn’t established: If your business is less than two years old, it’s unlikely that a traditional lender will be willing to take a chance on funding your business.
- Your business credit score is lacking: Once you apply for an employer identification number, you’ll start building a business credit score that you can improve by paying your bills, establishing trade credit accounts, and staying in business. Business and personal credit score both affect whether a lender extends you affordable financing.
- You lack a demonstrated need: Taking on debt is a common tactic for raising funds, but you should never do so unless you need to. Lenders will pass on financing a business that can’t demonstrate why they need funding, and how they’ll pay it back.
If, as a home business owner, you identify an area that requires serious investment—an expansion to another location, or a great bulk deal on inventory—you should be able to make your case to lenders, whether they are your local bank or an online lender.
Plus, business loans aren’t your only funding option. You have everything from loans to grants to crowdfunding to explore.
The best funding options for home businesses
Of course, home-based businesses run the gamut in terms of what they do and sell. Your business may offer a SaaS, or sell handmade pomade. You may be the sole proprietor, or oversee a remote-based team.
Therefore, the kind of funding your business needs—and what you can qualify for—will depend on, well, what your business needs.
With that in mind, here are the most common and responsible forms of funding out there for home businesses.
SBA Loans
The Small Business Administration’s loan program is considered one of the most important financial resources available to small business owners. The SBA works with banks, community development organizations, and micro-lending institutions to ensure that small businesses have access to affordable financing they might not qualify for otherwise.
There are a variety of SBA loan programs meant for different funding purposes and business types. The most relevant and useful loan program for home-based business is the SBA Microloan program.
SBA Microloans are “small” loans (ranging in amounts from $50-$50,000) for small or new businesses. Unlike the other SBA loan programs—and most other affordable loans—an SBA Microloan is available to startups, helping them get off on the right foot. The average SBA Microloan is for about $14,000, and can be repaid in as many as six years.
The process for obtaining an SBA loan is arduous, but there may not be a more affordable debt financing option available to small business owners. It’s worth the effort to apply.
Bank loans or credit union loans
A business loan from the bank is every small business owner’s dream. There’s one problem: It’s very difficult to get a small business loan from a bank.
If you have a long-standing relationship with your local bank, and have been successful with your home business for some time, you may qualify. Ditto if you’ve already taken on and repaid an SBA loan, which is designed to show banks that you’re a good bet to lend to.
Otherwise, loans from banks or credit unions are hard to come by. Not only are small businesses riskier to lend to than big businesses, but the amounts of money that small and home-based businesses typically need may not be worth the time and effort banks need to underwrite and process the loan.
Online lenders
In the wake of the financial crisis in 2008, banks mostly retreated from lending to small business owners. In their wake, new class of lender emerged: alternative or online lenders. These lenders, such as OnDeck, Quarterspot, and even more established financial tech companies like PayPal, filled a funding niche that is expanding even today.
Online lenders focus on short-term debt financing: loans, lines of credit, and other financing products with repayment terms that typically last between three-18 months. These loans are more expensive than bank loans, and are for relatively smaller loan amounts (while bank loans can go up to $5 million, many online lender products are capped at $250,000).
The upsides? The turnaround funding time can be blazing fast—as little as one business day—and qualifications are much less stringent. If you are a new business owner with middling credit who has identified an opportunity that will pay for itself, despite the high interest rates, this option can work for you.
Business credit cards
Credit cards are essentially short-term loans that allow you to better control your cash flow while accruing reward points, perks, and purchase protections (depending on the card).
A business credit card is a great first step to take when separating your personal and business finances—a necessity when working out of your own home. Your finances be easier to parse and organize come tax time, and you’ll maintain the corporate veil that prevents you from becoming personally liable for business debt.
There are a wide variety of business credit card options available to small business owners. For those with excellent credit, a card with a 0% introductory APR offer may be available. That’s an interest-free loan for sometimes as long as 15 months. Other cards may emphasize cash back rewards, low interest rates, travel miles, and other specific perks.
Use your business credit card to track your business spending, as well as finance major purchases such as new office equipment. If a machine suddenly breaks and you need to replace it right away, putting it on your credit card is a good way to give yourself a cash flow cushion while you come up with the funds needed, rather than immediately sinking your much-needed liquidity into this unexpected cost.
Invoice financing
Invoice (or “accounts receivable”) financing is great for home businesses that have lots of steady customers and bill by invoice.
Rather than waiting for clients to send along what they owe you—you can access your funds right away by financing those invoices to a lender. Many invoice financiers will provide you 85% of the value of the invoice upfront, sending along the rest once your client sends their payment (minus fees and interest, of course).
If you’re often facing a cash flow crunch because of the uncertain nature of your invoices, this is a good way to regain consistency and keep your business moving, even if it comes at a cost.
Purchase order financing
Purchase order financing is similar to invoice financing, but for the reverse issue: You suddenly need more cash than you have on hand in order to pay a supplier. This can happen when you receive a huge, unexpected order for a product and need to lay out enough capital to cover the costs before you get paid.
In this scenario, a lender pays your manufacturer, (fulfilling the purchase order), then receives the outstanding sum from you (plus interest and fees) when you have the money. This is a great way to fulfill your orders without turning away customers—an eternal business no-no—or sacrificing your liquid capital.
Home equity business loans
Have you identified a low-risk business investment opportunity, but don’t have the working capital to make it happen—nor the business assets to put up for collateral? A home equity business loan could be a good fit in that case.
If you own your house, you can use the value of it as collateral for a business loan. The bank will assess your home in order to decide how much to lend you. Then you pay off the loan as you would any other.
The risks here are obvious: If you fail to repay your loan, you could lose your home. In this case, no business protections set up by establishing an LLC or S-Corp will prevent the bank from repossessing your house. Therefore, this type of funding should only be sought when the opportunity is as low-risk as possible.
Personal loans and savings
It’s worth noting that you can also use a personal loan to fund your business venture. If you have a young business and can’t qualify for some of the more affordable business loan options, a personal loan (which is based on personal financial history) can be a good stopgap option.
Keep in mind that personal loans are typically capped around $40,000—meaning major capital needs above that amount can’t be addressed with a personal loan. Your personal credit score will also take a hit if you fail to repay this loan.
Grants
There’s one thing better than affordable funding for your business, and that’s free funding. Though much harder to qualify for, and typically for amounts lower than what you could obtain via loans, business grants are a great funding option.
Unlike loans, you won’t have to worry about APR, repayment terms, origination fees, or any other costs. Just apply, qualify, and take your money.
There are literally hundreds of business grants that you can apply for in order to give your business an infusion of working capital. There are grants from federal government agencies (the NSF, the EPA), state agencies (Arizona Commerce Authority, the Minnesota Investment Fund), corporations (Etsy, Coca-Cola), and nonprofits that aim to help underserved populations (the Amber Grant, the First Nations Development Institute Grant).
Grants have some drawbacks, however: Most are for a few hundred or few thousand dollars, and they often aren’t no-strings-attached, either. Unlike many loans, where you can use your funds for just about any general business purpose, grants may have specific stipulations on what you can spend your funds on.
To get started, try searching for local and state government or non-profit organizations that offer small business grants, or getting in touch with your local Chamber of Commerce to learn more. You can also consult a master list of small business grants at every level and apply to each one that makes sense for your business.
Crowdfunding
It’s worth noting that crowdfunding—pulling in contributions from friends, family, and even complete strangers—is an increasingly popular way to raise funds for your new or growing business.
Most people are familiar with rewards- or donation-based crowdfunding—collecting contributions from people in exchange for some sort of (typically non-monetary) reward, or just as a gift, respectively—but there is also equity-based and debt-based crowdfunding. These models work much in the same way that traditional equity or debt financing fundraising does, just on a public platform.
To date, crowdfunding has raised tens of billions of dollars across dozens of platforms, each with its own niche or focus (computer hardware startups, remodeling homes, making music, etc.). You’ll have to write some fairly compelling copy for your pitch, and face the (high) possibility of not reaching your goal—but other than that, the stakes are fairly low. If other avenues of funding haven’t worked out, this is worth a shot.
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Cash flow crunches, discount opportunities, growing demand, emergencies—whatever your reason for seeking funding for your business, there’s likely an option for that.
The first step, before applying for any one loan product or grant, is to prepare your business. Get your documents (tax returns, bank statements, profit and loss statements, and more) in order, improve your credit score, and write your business plan. A stronger business means more affordable financing, which begins a virtuous cycle of growth and opportunity for you and your venture. That’s how you go from a small business to something much more.
7 Tips for Saving During the Startup Phase
They say a penny saved is a penny earned, and that’s especially true when you’re running a new business. Companies in the startup phase need to be careful not to overspend their limited resources, or they’ll run out of cash quickly.
A frugal mindset (not a cheap one) is crucial until your business is established and you can afford to take a few risks. To put yourself on the right path, consider these seven tips to saving money as a startup:
1. Don’t quit your day job: As a new entrepreneur, you likely won’t be able to pay yourself nearly the same salary—or much of anything—that would make from your day job. Rather than diving full time into your startup, test your business idea and build a minimum viable product in your spare time. Don’t quit your job until you have a proven business model that you know can sustain you.
2. Look to the gig economy: When looking to hire, consider bringing on freelancers and specialists from the gig economy to help out. You can bring these workers in on a trial basis, and see what they bring to the table, before committing to hiring someone full time. You may also find that hiring on an as-needed basis is more effective than committing resources to a long-term position.
3. Focus on ROI: Every dollar you spend on your startup should have a dedicated ROI—return on investment. Don’t spend money checking off boxes: focus on the tactics that bring a return. For example, all digital marketing channels are important and useful, but email marketing has the highest demonstrated ROI of them all. Start there before moving on to social media and SEO.
4. Create a referral program: Speaking of ROI, customer referral programs are a low-cost way to expand your marketing funnel and find more qualified leads. One Harvard Business Review study found that referred customers were both more loyal and more profitable to the business. Create an incentive for current customers to refer their friends and peers—it’s worth the investment.
5. Barter with other small businesses: Need help with your branding, or filing your legal documents? See if you can trade services with other startups, offering your expertise in exchange for theirs and saving you both money in the process. These partnerships could continue to pay dividends in the years to come as you both grow.
6. Seek out no-fee options: You may be accustomed to banking products from your local bank, but if they charge you fees to use their business bank accounts or credit cards, it’s time to seek new no-fee options that still provide bang-for-buck. The same goes for software that requires a subscription: There are plenty of platforms that offer free or trial versions with limited capabilities that may serve your needs in the startup stage.
7. Buy or lease used, not new: Especially in the early startup stages, there’s little reason to lay out serious capital to buy new equipment. Whether you need computers and routers or heavy machinery, find lower-cost options that will get the job done until your cash flow is more stable and you can upgrade to longer-lasting assets.
