Almost all businesses need outside financing at some point, and there is a wide range of options to sort through. The process isn’t much different whether you operate a business out of your home or office, but you may face some additional challenges. We’ll explore home-based business loans, the obstacles you might encounter and a variety of financing options.
Home-based business loans are simply business loans offered by lenders to people who work out of their homes. They can sometimes be more challenging to get because home-based businesses don’t always have all the qualifications that traditional business lenders require.
For example, if you’re running a business from your house, you may be a newer company, have fewer assets or still be growing your revenue. These factors — revenue, assets and time in business — are all aspects of your business that lenders often consider before granting loan approval.
Because it can be more difficult to find home-based business loans, you may have better luck with alternative financing solutions or online lenders than with traditional banks or credit unions. In addition, lenders may focus more on your personal creditworthiness — or ask for collateral or a personal guarantee — when considering your loan application.
Consider multiple types of business financing, requirements needed to qualify and which of these options makes sense for your business and funding needs.
Working capital loans are basically any short-term business loan designed to help a company cover its daily operational needs, such as purchasing inventory, making payroll or handling other expenses. These types of loans may benefit home-based businesses that are seasonal in nature or otherwise have inconsistent income.
You can gain working capital through a term loan, a line of credit or other type of funding. However, interest rates can be significantly higher than other loan types, and poor credit may require collateral.
Microloans are small business loans that usually top out at $50,000. Lenders often award them to businesses in rural or underserved areas, but they’re also suited for businesses owned by women, minorities or veterans.
They’re usually offered through non-profit, community-based lenders or government agencies like the Small Business Administration (SBA). Depending on the nature of your home-based business, they may be difficult to qualify for, but it might be worth a look.
Home-based businesses need equipment, too. Equipment loans can be easier to qualify for because the asset you purchase is generally used as collateral — much like a car loan. Plus, interest rates are typically better for loans secured with collateral than unsecured loans. However, in some cases, you may need to make a down payment.
If you don’t need a lump sum of money to support your home-based business but want some funds to draw on from time to time, a business credit card might be a good solution.
You’ll typically need a good credit score to qualify, but the application process is fairly easy, and you could have access to credit within a few days.
Business lines of credit work similarly to credit cards, except you have ready access to cash if you need it, and credit limits are usually higher than with business credit cards.
Because of the higher spending limits, though, they may be harder for a home-based business to qualify for. For example, lenders may have minimum revenue requirements and years in business you’ll need to meet.
However, if your business can meet the criteria — or offer collateral to secure the loan — business lines of credit can be a valuable source of funding. Plus, you can draw on it only as much as you need, and you’ll only pay interest on the funds you use.
An ACH business loan — also known as an ACH advance or ACH cash flow loan — is a type of financing where the lender automatically deducts payments from your business bank account via the automated clearing house (ACH).
ACH loans can be easier to get even if you have poor credit or your home business doesn’t meet more traditional lender requirements.
But interest rates are typically high, there may be additional fees and payments may be required weekly or even daily, so this loan type might not be a fit for every home-based business.
For home-based businesses that rely on debit and credit card sales, a merchant cash advance (MCA) could be a good fit. With MCAs, a lender gives you an advance based on your future card sales and gets repaid as you collect on those sales.
However, MCAs are an expensive form of borrowing, and you’ll need to meet minimum sales volume requirements. Plus, MCAs usually require daily payments, which can be tricky if you hit a slow patch.
If your home-based business invoices clients, you may be able to get an advance on money owed to you through invoice factoring.
With invoice factoring, you sell your unpaid invoices to a factoring company for a percentage of their value. The factoring firm fronts you a percentage of the invoices’ value and takes over the collection of those invoices.
You don’t typically need good credit to qualify for invoice factoring, but you’ll need a minimum amount in outstanding invoices and creditworthy customers. This option generally makes the most sense for business-to-business (B2B) firms with a high volume of unpaid accounts receivables.
Invoice financing is similar to invoice factoring, but instead of selling your unpaid invoices, you take out an advance on what you’re owed and repay the advance as your customers settle their bills.
But, like invoice factoring, invoice financing is typically best suited for B2B companies. And both factoring and financing invoices are some of the more expensive forms of funding.
The exact process varies depending on the lender and loan type. In general, you can follow these steps to find and apply for home-based business loans:
The qualifications required for home-based business loans vary by lender and loan type, but general criteria include:
There are a few things you can do to increase your odds of loan approval, especially if you think you may not qualify based on your existing credentials.
If you own something of value — ideally worth as much or more than the loan amount — you’ll have a better chance of loan approval if you use it to secure the loan.
But keep in mind that this increases your risk. If you default on the loan, the lender can seize your asset. This loss could be devastating if, for example, the collateral is a vital part of your business.
Adding a cosigner or co-borrower to your loan application could also help with loan approval, especially if they have a better credit score and stronger financials. To clarify, a co-borrower is equally responsible for repaying the loan, whereas a cosigner is only on the hook if you can’t make the payments.
It’s critical to know the lender’s requirements to qualify so you can do your best to meet them. For example, if a lender requires a credit score of 640 — and yours is a bit lower — you may need to work on your credit score before applying. Or, look for lenders or loan types that match your existing qualifications.
It’s likely that many home-based businesses have yet to establish business credit. In that case, you should come to the table prepared to sign a personal guarantee, making you legally liable for the loan.
But keep in mind that if your business can’t repay the loan, lenders can go after your personal assets, such as your home, car or other valuables.
Consider the risks and rewards of home-based business loans before you take the plunge.
Outside funding can be a great way to help you expand your home-based business or take it to the next level. However, it’s important to consider your motives for getting a business loan to decide if it’s the right move right now.
There are several good reasons to get a home-business loan.
There are other times when getting a loan for your home-based business might not make sense.
If home-based business loans aren’t in the cards right now, consider these alternatives:
It can be challenging to find business loans for your home-based company, but it’s not impossible. You may want to consider alternative financing solutions or business loans from online lenders rather than brick-and-mortar banks.
Just be sure to have a clearly defined loan purpose, the necessary documentation on hand and the willingness to do the research to find the best loan product for your home-based business.
A good credit score is always a plus if you’re looking for a business loan, but some lenders — especially online — will work with bad credit borrowers. They’ll likely charge a higher interest rate, but you may be able to get more competitive rates if you have collateral or a cosigner. You could also look into business loans with no credit check.
It can be more difficult to get a business loan before you’ve even started a business, but it’s not impossible. Rather than applying for more traditional business loans — which can be expensive and hard to qualify for — you may want to consider personal loans, home equity financing or using your savings to get your business up and running.
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