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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.
What is a home-based business loan and how does it work?
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 that cater to employed people 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.
Types of home-based business loans
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
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
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.
Equipment financing
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.
Business credit cards
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
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.
ACH loans
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.
Merchant cash advances
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.
Invoice factoring
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
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.
How to apply for a home-business loan
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:
Define your loan needs. Clearly define your purpose for the loan and how much you’ll need to accomplish your goals. These factors can help guide you toward the loan type that makes the most sense.
Research lenders. Search for lenders that offer the loan amount you’re looking for and explore their loan products.
Compare your options. Once you’ve found a few lenders, compare rates, loan terms, fees and other details to find the best deal. If possible, get prequalified to gain a better idea of the rate you may qualify for.
Gather your documents. Be prepared by gathering all the paperwork you may need as part of the application process. Documentation may include financial statements, proof of ownership, business plan, loan proposal, bank statements and tax returns, among others.
Apply. Fill out the loan application and submit the required documentation. Depending on the lender and the loan type, you could be approved the same day you apply or within a couple of days.
Review and sign. Carefully read the terms and conditions of your loan agreement so you know exactly what you’re getting into before you sign.
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Qualifications for a home-based business loan
The qualifications required for home-based business loans vary by lender and loan type, but general criteria include:
Credit score. Most business lenders require a good credit score of 670 or higher to qualify for loan approval, but some accept lower scores. Your home-based business may not have a business credit score, but if you do, that is a factor.
Revenue requirements. You may need to meet minimum annual or monthly revenue requirements to qualify for certain types of business loans.
Years in business. Some lenders only consider home-based businesses that have been in operation for at least six months or more.
Loan proposal. Depending on the type of loan, lenders may want to see your plans for the loan proceeds to help them better assess the risk.
Collateral or personal guarantee. Some lenders may require collateral to secure the loan. Or, you may have to sign a personal guarantee, which makes you personally liable for the debt if your business can’t repay it.
Documentation. Most home-based business loans require you to submit at least some paperwork to qualify for loan approval, such as bank statements, tax returns or other financial statements.
How to increase your chances of getting a home-based business loan
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.
Offer collateral
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.
Add a cosigner or co-borrower
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.
Find out lender requirements
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.
Have a personal guarantee ready
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.
Pros and cons of home-business loans
Consider the risks and rewards of home-based business loans before you take the plunge.
Pros
Access to funds. A business loan can provide much-needed capital to grow or expand your business.
Fast funding. Some of the faster funding options could allow you access to certain opportunities you might otherwise miss out on.
Helps to build business credit. Many business loans help you build credit, making it easier to qualify for other financing down the road.
Cons
Higher rates. Loans for home-based businesses may be harder to find — or considered riskier for the lender — so you could end up with higher rates than more traditional business loans.
Fees. Lenders may charge home-based businesses additional fees that are sometimes waived for more established businesses.
Risk of default. If you can’t repay your loan, you’ll hurt your credit and possibly put your business at risk, too.
May require collateral or personal guarantee. Home-based business loans that require collateral or personal guarantees put more than just your business at risk.
Should you get a home-based business loan?
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.
When a home-based loan is a good idea
There are several good reasons to get a home-business loan.
You’re just starting out. It can be tough to get a new business off the ground using only your own money. You may need funds to buy inventory, office equipment or a new vehicle.
You want to grow your business. Even if you’ve been in business for a couple of years, an influx of cash might be one of the fastest ways to expand.
Emergencies. Depending on the nature of your business, certain business emergencies could derail your plans if you can’t get access to funding.
When not to get a home-based business loan
There are other times when getting a loan for your home-based business might not make sense.
If it’s too expensive. If the repayment schedule on your loan will stretch your budget too tight, you may want to hold off on getting a loan until you can afford it.
If it can wait. Can you get by with your old work vehicle for another year or so? If so, you might want to wait until you’ve saved enough money to pay cash.
If you have really bad credit. Good credit is arguably one of the best ways to keep loan costs down. If your credit isn’t great — and you have a little time — you might want to work on boosting your credit score before applying for home-based business loans.
Alternatives to home-based business loans
If home-based business loans aren’t in the cards right now, consider these alternatives:
Personal loans. Plenty of businesses got their start by using funds from personal loans. They may be faster and easier to get than some types of business loans. And, if you have good credit, they might be more affordable as well.
Home equity financing. Homeowners may want to consider leveraging their home’s equity to fund a home-based business. Consider a home equity loan if you need a lump sum of cash or a home equity line of credit (HELOC) if you prefer to withdraw funds on an as-needed basis.
Grants. Grants are an alternative to loans, but they can be competitive and hard to find. Still, it might be worth looking into small business grants from the Small Business Administration (SBA) or other public and private organizations. Free money is hard to beat!
Crowdfunding. Crowdfunding raises money through small donations from a large number of people. Depending on the platform, you may not even have to pay the money back.
Private investors. Another alternative to loans is selling equity in your company to investors. Just keep in mind that investors may want a say in your business — think Shark Tank — along with a piece of the profits.
Loans from family or friends. Maybe you have some friends or family members with deep pockets who want to invest in your business.
Bottom line
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.
Frequently asked questions
Can I get a home-based business loan with bad credit?
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.
Can I get a loan to start my own business?
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.
Lacey Stark is a freelance personal finance writer for Finder, specializing
in banking, loans, investing, estate planning, and more. She has 20
years of experience writing and editing for magazines, newspapers, and
online publications. A word nerd from childhood, Lacey officially got her
start reporting on live sporting events and moved on to cover topics
such as construction, technology, and travel before finding her niche in
personal finance. Originally from New England, she received her
bachelor’s degree from the University of Denver and completed a
postgraduate journalism program at Metropolitan State University also
in Denver. She currently lives in Chicagoland with her dog Chunk and
likes to read and play golf.
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