When Is It Time to Take Out a Loan for Your Home Business?

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A home business can either be an early-stage startup or an established and profitable business. Regardless of the size of your home business, the question of when to take a out a business loan is a difficult one. To help, there are 3 different stages when a home business might consider financing, each with different financing options.

Aside from relying on your savings and/or borrowing money from friends and family, the most popular method of raising money is to take a loan from a bank. However, getting a business loan from a bank requires a business owner to have strong personal finances, such as a credit score of 680+, equity in real estate, and more.

Fortunately, business loans from a bank are just one of many home business financing options. Let’s take a look at the 3 times in the lifecycle of your business when it makes sense to rely on outside financing. Further, we’ll look at the different loan options at each stage.

Times When Home Business Financing Makes Sense

There are 3 times when home business financing makes sense:

  1. During the startup phase
  2. During the initial growth phase
  3. One the business moves out of your house

Financing options will differ based on the stage of business you’re currently at.

1. Startup Phase

Starting a business requires initial funding. The startup money you need will vary greatly depending on your business operations. You may need funds for a website, marketing, office expenses, or working capital for your first round of inventory purchases. Further, if you need any specialized equipment, (machinery, tools, etc) you might need even more upfront capital.

Usually, entrepreneurs use their cash savings and personal assets during this phase. However, borrowing money through personal loans, credit cards, or tapping into the equity in your home with a Home Equity Line of Credit (HELOC) are also all great options.

You can even use retirement savings to fund your home business during this phase. A Rollover for Business Startups (ROBS) allows you to use retirement funds without paying early withdrawal penalties and taxes. A ROBS can be used in conjunction with other types of financing and because it’s not a loan, you’re not forced to start making loan payment right out of the gate.

2. Initial Growth Phase

As home-based companies begin to grow, they’re often presented with various opportunities that can help accelerate their growth. Understandably, these opportunities require upfront capital investments, but the capital required may exceed your business’s current cash flow.

Fortunately, there are short-term business loans and small business lines of credit that you can get pretty quickly, usually within a week. Your business ideally needs to be operating for at least 12 to 24 months to be able to qualify for these financing options.

Short-term business loans are the perfect solution when you need to borrow a small, lump sum amount, typically $500,000 or lower. Repayment terms are usually within 3 months to 5 years. Payments consist of both interest and principle and are usually made monthly.

Business lines of credit, on the other hand, can be the answer if your home-based business needs easy access of cash for a short period of time. A line of credit is useful for inventory purchases and other short-term cash flow needs. It works similar to a credit card, letting you draw from a credit line and pay off what you borrowed without needing to use it.

3. Moving Beyond Home-Based

The third phase is when your business has grown enough that it needs a place of its own. Bigger growth requires bigger funding. This means that the financial product’s you’ve relied on up to this point probably won’t cut it anymore. Instead, you have larger capital requirements and need different types of funding.

If you’re looking to grow your team, grow your operations, or buy a space where you can operate your business, SBA loans or commercial real estate loans can be the right solution. SBA 7a loans fund up to $5MM and can be used as working capital, such as purchasing inventory, renting an office space, buying machinery, and more.

SBA loans and traditional business term loans generally require a strong credit score (680+), 2 years in business, growing revenues and a profitable business. One thing to keep in mind is that they have relatively involved application processes and can often take 45 to 90 days to get funded. There is also the CDC / SBA 504 program that has comparatively longer repayment terms at lower interest rates.

Commercial real estate loans, on the other hand, typically have loan amounts of up to $5 million, but can be much higher in some cases. They can be used for the purchase of commercial properties intended for business use. These loans are most commonly used to purchase office space, a warehouse, etc.

Bottom Line

Whatever stage your home business finds itself in right now, remember that you should only commit yourself to financing if you can expect a good return on investment. Whether you’re investing in launching your business, financing a first round of growth, or moving beyond the home-based business, the cost of borrowing should never outweigh the returns you expect.