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 homebased 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 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.
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