By Andy Hughes
The location of your business has no bearing on its chances of success. At least that’s what the growing number of entrepreneurs running successful home-based businesses has proven. Unfortunately, it’s not as straightforward as it appears. Home-based businesses face as many challenges as companies operating from traditional offices, if not more. Polite On Society explains that overcoming these challenges is what separates the few savvy and persistent entrepreneurs from the many who fail.
Creative Financing Options
For home-based businesses, the main challenge is accessing the right type of financing. Financing any kind of business is typically hard but the nature of home-based businesses disqualifies them from most conventional financing options. As Bplans notes, when business lenders evaluate a business, they consider essential elements including assets, track record, and business credit history. Most home-based businesses fail this test.
Just because your home-based business fails to meet the standards of most lenders doesn’t mean you are out of options. There are several creative ways of financing that you can consider. The best financing options vary with the type of business and resources available to individual entrepreneurs. Most turn to transitional financing options until they can qualify for better opportunities. A home loan is a good example of such options.
Home Equity Loan and How It Works
Using a home loan to finance a business is not a unique concept. Such loans allow you to borrow against the value of your home to fund your growing home-based business. NextAdvisor points out that the amount of financing you get depends on the lender’s assessment of the value of your home minus any mortgage balance due. It is essentially akin to a mortgage.
Home equity business loans are ideal for low-risk investments. You should only use such a loan if you have a high certainty that your business will generate enough revenue to pay back the debt. Since your house serves as collateral, the price for failing to pay is high. If the business stalls or fails and the mortgage payments become unmanageable, the risk of losing your house is very real.
How to Get a Good Deal on a Home Equity Loan
Home loans are available either as a fixed-rate loan or a home equity line of credit (HELOC). A fixed-rate home loan is typically a lump sum while a HELOC offers the borrower a line of credit with variable rates. The amount you are allowed to borrow is generally a percentage of your home’s appraised value. The amount disbursed and interest charged are also determined by your payment history and credit score.
Unfortunately, the business protections enjoyed by business entities like S-corps and LLCs do not apply to home-based businesses. Considering the risk of having your house repossessed in the event of a default, you should make sure you are getting the best deal before taking a home equity loan.
- Determine what you can afford to repay. Only take a home loan to fund low-risk scenarios of your growing home-based business.
- Compare terms, fees, and interest rates from at least three lenders. Credit unions generally offer more personalized account services and better interest rates than banks.
- Make your own honest valuation of your home’s value and credit score before getting preapproved for your loan. This will spare you from the application fee in case you do not qualify for the loan.
Final thoughts
One of the biggest upsides to launching a home-based start-up is significantly reduced capital. This business model helps you avoid the costs of leasing or renting an office space or physical location since you are operating out of your house. In addition to saving you on initial and operating capital, your house can also help finance your business when you convert its value into cash in the form of a loan.
Polite On Society is a blog of political and social commentary primarily aimed at the African-American community, engaging in dialog about the various aspects of life that often are not spoken of openly. Reach out today for more info!