Small business finance

Thursday, 19 April 2007

How to source for your small home business finance

By Jan Leow

Let's face it; you need money to make more money, after all money makes the whole economic world goes round. Where are you going to get it, or rather from whom are you going to get it from to finance your small home business venture?

Let's have a quick list financing source:

  • From friends and family, which would be the easiest to seek out initially.
  • If you have worked before and was prudent enough to put aside some money as savings, that would be your capital.
  • Your credit card is another source, but be aware that their interest rate is rather high. But as a quick source of small business loan, this may be a quick fix solution.
  • Check with your local bankers, some of them may provide small simple personal loans without requesting for collateral.

The above list is by no means complete, and there are other avenues of sourcing for funs. Your funds could be a combination of any of the above too. Asking from Family and Friends

As a start, if you have got a sugar daddy, that may be a no brainer. Just ask and it shall be given. But let's face reality, not everybody has very rich parents, besides, they need it too for their retirement and other emergencies. It wouldn't be fair to take it from them, and what would happen if your home based business is not faring as well as it should? But just for the record, approximately sixty percent of all business startups with financial help from friends and family. So it would seem this would be one of your first options for obtaining business financing.

However do note that as much as 70% of new business start ups fold within the first 2 years. Least of all if you have no experience starting up a small business at all. Comforting thought. But you do need to start somewhere. So having made up your business plan, you need some capital to jump start your home based business.

Your friends and family are the ones that would understand your ideas and goals much better than anybody else, and they might an interest in your home business too. Besides, they may be entrepreneurs themselves too, and might give you some insights and tips on how to go about starting your home based business and making it grow. Their expertise may prove to be invaluable apart from their business financing.

Do note that money matters can strain your relationship with your friends, family may be more understanding, but no less that it might cause friction too. When trying to make a case for a friendship or family loan, most transaction is done on an informal basis. But you will still need to draw up some legal aspect or put things in written form just to safeguard both the lender and lendee just so to avoid misunderstanding. In case relationship becomes sour, that piece of paper would be a clear case to avoid dispute later on. Still, many a times, many a transaction are done just based on a gentlemanly informal word of agreement, so in this case trust and personal integrity of each party needs to be of good caliber.

One way to clear up any misunderstanding is to have everybody sit together and have clear discussion of what will entail with their investment and draw up a written agreement if possible. If your home business venture becomes successful, great, everybody gets a piece of their fair share of reward. On the other hand, if your home based business goes bust, there must be an understanding that you have tried your very best to safeguard their interest but due to unfortunate events, all was lost and they should not have a claim against you. If it was treated as loan rather than as an investment, than you will be indebted and will still have to repay the loan even if your small business did not go well.

Some caveats to watch out that family or friends does not pressure you to pay back the money within a short time frame, after all it takes time to grow the small business into a profitable one; watch it that they don't pressure you to repay back the money with high interest; and not to press for monetary returns when your home business is finally kicking and generating some cash returns regularly and thus jeopardizing your cash flow.

Funds from Personal Savings

Personal savings is another way to help finance your small home business, but it could be tough call too, especially if you have spend the better half of your time accumulating it. Even if you are not even considering starting a small home business, you should already be putting aside some funds aside. Nowadays, the fixed deposit rates are really dismal and you need to find other more rewarding financial instruments to park your liquid cash. In doubt just stick back fixed deposits as they are the safest low risk way of parking your cash. But do note that you will still lose out in the long run due to inflation which makes your money less value as time goes by.

Using Credit Card as Source for Business Finance

Credit cards are a fast way of obtaining liquid cash, but do note that their higher interest rate as well as other bank charges the instant you withdraw cash from credit cards makes it a very expensive way to finance your home business start up. Using credit cards as a source of liquid cash to use it as business finance for your start up has much limitation.

Does that mean you should not use your credit card? By all means no, but rather you could use it as way to furnish your home business with the necessary equipment and perhaps to use it purchase your raw materials to make your product and use the credit card to roll your cash flow. For instance you may need certain equipment for your home business startup such computers, fax machine, you could use your credit card to make the purchase and make use of its initial interest free period before making installment repayment. Or you can check retailers who would give out monthly installment to your purchase with monthly repayment scheme using your credit cards. This would lighten your initial start up cost by spreading out your equipment purchase cost over a period of time thus freeing up your other business financing option for purchasing your other necessary items for your business start up.

If you could afford it, do repay back as much as possible to minimize the interest charge of your credit card. Otherwise work out cash flow plan to make back the repayment. If you have multiple credit cards, you may also consider balance transfer to take advantage of the lower interest charge of the other credit card company. It may be somewhat troublesome but the savings from the lower interest charge is well worth it.

Because of the high interest, you may want to consider this method as a last resort for obtain business financing. However it is one of the easier ways of obtaining business financing for your running of your home based business.

Small Business Loan from Financial Institutions

And finally obtaining a personal loan from bank may be pretty hard to do. Banks are the worst way of obtaining business financing. Why? Because when you need business financing the most is when they don't give it to you. In some cases, where the economic situation is not so good, and when businesses need financing the most to keep it going, is when they pull the carpet right from under you, making you deeper into financial crisis.

Banks only make loans when they are sure that the loans can be serviced by the borrower at the very least the interest part of the loan. Banks in reality are doing a business too, and they want to maximize their profits. So in order to do so, they would prefer to lend out corporation which are doing well or individuals who are outstanding in their payment records. There in lies the lies the catch-22 situation, the companies and individuals who are doing well are the ones who don't need the extra credit, but you as a start up on the other hand, need funds desperately, but without a track record, the banks don't want to risk financing your operation.

However, there may still be some bank that would be willing to give out small loans without any collateral of any sorts. These are few and in between. But they do exist! I have seen flyers sent out by these banks giving out small simple credits without requiring difficult document processing asking for any kind of personal guarantees or collateral. Usually this are provided to existing customers who has a savings or current account with them or even using their credit card services.

Banks such as these has much liquid funds and they just want to earn some interest from existing clients. Sometimes this simple loans has some special offers like very low interest or even interest free (but they still charge a service fee anyway to earn something from you!) for short periods, usually a six month duration before charging you the full interest of the loan. They just want you to spend, spend, spend! Spend on anything from going for a vacation break, home improvement renovation, etc. Well you have some better use for it right? Yes, use it to business finance your start up or to expand your existing home business!

The above examples are the usual obvious place to look for business financing. There of course other avenues such as venture capitalist. But if your product idea or service isn't much more innovative and lies in the area of common goods and services, you are not likely to attract venture capitalist to invest in your little start up. But who knows, if your small home business has grown some and there seems to be potential to expand your business into something more, you just might have some venture capitalist looking you up!

So take stock of your situation and see what kind of business financing would suit your needs for starting a home business or expanding it further.