Financing Your Home Based Business - Ways to Fund Your Startup
Starting a home-based business is not something that everyone has a stomach for, especially if you have been in service for some time and used to a definite paycheck at the end of each month. With a start-up comes the possibility of making lesser than you already do in a steady job but the same also comes with a potential and growth that can be much higher than what you can possibly dream of in a regular job. One of the main things that keep people from venturing out and starting on their own is the initial investment that it takes. Eating into savings and family funds is not always a desirable or pleasant thought. If you are keen on starting your own business and are in a fix only with the initial financing aspect, read on for the various financing options that you have.
SBA Loans
SBA is Small Business Association in America that helps in providing loans to people who want to start off on their own. The SBA actually guarantees loans that are provided by private banks or individual lenders. This system helps the lenders to minimize the risk that they run by funding a new startup company or business.
It is important to note that though the lender does not have to worry about a renegade borrower, you still have to provide collateral for the loan that you are asking for. This could be any of the assets that you own like a car or your house or some family jewels that you may have. The collateral is only meant for security and will be returned to you after the tenure if the business has been doing well and has been able to pay back the principal and the interest.
Any organization that is being set up ‘for profit’ can avail of these SBA loans. You have to just present the case and the idea and show that there is potential to make money in the business that you are proposing.
There are charges for approved loans that differ based on the amount that has been approved. The charges can vary between 2% to 3.5% based on various slabs that have been defined. While the SBA charges the annual fee and processing fee, the interest rate is decided between the borrower and the lender. In most cases, the loan amount cannot be used for any expenditure other than that associated with creating, developing and growing the business. The money therefore cannot be used to pay off existing loans or clear current debts or clear late taxes. The money is meant to be used for business activities like purchase of real estate, furniture, equipment, salaries and the like.
Loan repayment tenure is generally 7 years but the fixed asset loans can be repaid till the end of the product’s economic life or 25 years. You can get some more information at the SBA site.
Angel Loans
Provided by angel investors, these are loans that people provide to entrepreneurs who want to start on their own. While these ‘angels’ are happy to provide amounts anywhere between $15,000 to $1,5million, they also expect higher returns from their investments.
In America alone angle investors provide loans to more than 250,000 people. Contacting an angel investor is however, not easy. You will need to network like never before and talk to colleagues and their friends and eventually you are likely to find someone who is willing to fund your efforts.
Make sure to also investigate on the Internet to find some angel investors.
Venture Capital Loans
Loans given out by venture capital companies are generally used by people who are looking to loan large amounts that run into millions of dollars. People who attempt to get funded through venture capital need to make formal business plans and pitches to companies. Venture capital companies also expect to get a return on investment that is in the range of anywhere between 500% to 1000% and are most likely to ask for representation on the board of directors of the company. While you may feel that you are losing some control over the manner in which you run the company, it is important to understand that the venture capital representative has the best interests of your company in mind too.
Pratt’s Guide to venture Capital Sources is a book that you can refer to if you are looking at a list of sources to approach venture capital companies.
Make your choice intelligently keeping in mind the amount of funds that you are looking for and the realistic returns that you envisage. If the amount that you are looking for is not too large for your home-based business, maybe approaching friends, family and well-wishers is a good idea. You can offer them some stake in the company so that they also benefit from the returns when the monies start pouring in. Such funding is relatively easier since acquaintances are less persistent and pesky about repayments as compared to the above mentioned options.