Starting a business with no money seems like a contradiction in terms, but there are many entrepreneurs who have done so and then gone on to build thriving companies.
Starting a business at home is a little different, but the funding principles are exactly the same. You will need money for the same things and your sources of finance will, essentially, be exactly the same.
Why Will You Need Finance For A Home Business?
There are two things you will need to invest in when you start your home business:
These are the assets you will need to run a successful home business. Assets like furniture and equipment (known as fixed assets), and less tangible assets like software. Without them it would be very hard to build a successful business.
Many home based entrepreneurs start by using mainly personal equipment, like a vehicle, a trailer, power tools or a personal laptop and printer.
Working capital is like bridging finance to cover the timing difference between money you have to pay others and money you receive in payment yourself. As we discovered when starting our small business many years ago, insufficient working capital can be disastrous, because it results in the business being unable to pay creditors on time. That, in turn, leads to them cutting off supply to your business and your having to field endless calls demanding money.
So, it is essential that you estimate your working capital needs accurately and conservatively. Our one page business plan template helps you do just that.
Small business start up financing is all about timing cash inflows and outflows to minimise the need for finance.
You have worked out how much money you will need for assets and working capital. What now?
What Are The Financing Options For A Small Business Operating From Home?
All sources of finance for a home based business fall into one of two categories – equity and debt. Equity refers to money invested in the business by yourself or others in return for a share of the business. Debt covers any kind of loan, from you, other people or the bank, which has to be repaid at some point in time.
Equity – Selling A Share Of The Business
You can offer a share of the business to either a venture capitalist or an angel investor in return for capital to start or refinance the business.
A venture capitalist is a company that provides capital to a business venture that has high growth potential. Its capital normally comes from pooling the funds of others into a venture capital fund. It aims to make money by selling its share at a profit after as short a time as possible.
Angel investors are like venture capitalists, except that they are normally affluent individuals who invest their own funds.
The main advantage of equity funding is that there is no expectation of capital repayments or interest payments in the short term. However, the investor is accepting considerable risk. He or she, therefore, expects to have a say in the running of the business.
For this reason, many home business entrepreneurs find that having an equity partner can be quite frustrating. Their motives are often short-term financial and many home business owners mistrust equity partners.
Debt – Borrowing From Others
The advantage of borrowing rather than equity financing is that you retain control of your business and don’t have to answer to anyone else. However, lenders are often much more inflexible about repayment than equity partners and borrowing can be very expensive. It is also frustrating to have to pay interest on loans before you can even start to pay yourself or your creditors.
There are two types of debt – short-term debt and long-term debt
i) Short-term Debt.
a. Creditors: By delaying paying creditors until you have received payment yourself, you are effectively getting them to finance your business. The most important rule about creditor financing is communication. Make absolutely sure that your creditors have agreed to extended payment terms and stick to them. That way you will retain their trust and their supply.
b. Personal credit: Using credit cards and personal overdraft facilities is an option for some. Whilst this has the advantage of not involving others, it can be very stressful when your income fluctuates.
c. Loans from friends and family: The essential rule with these informal loans is to formalise them. Even if the providers of the loan have not asked for a written acknowledgement, you must specify your understanding of the terms of the loan in writing. Too many friendships and family relationships have been destroyed by loan arrangements that went sour through poor communication.
ii) Long-term Debt
There are two sources of long term loans for a home business – bank loans and government loans.
Bank loans can be either secured or unsecured. Unsecured loans are normally smaller in amount and quicker to obtain (as long as your credit rating is good). Secured loans require you to provide collateral in the form of property or even unpaid invoices (called factoring).
Government loans are facilitated by the Small Business Administration. The SBA does not provide funding directly. It facilitates funding through a network of local lending partners by acting as a guarantor. To qualify for SBA facilitated funding, small business owners have to meet minimum criteria and provide detailed information about their business.
Whatever financing option or mix of options you decide to use, it is advisable to provide a business plan to your lender or investor. Successful funding is all about having a good understanding between business partners. A business plan serves as a point of reference and a one-page home business plan is the most practical way to do this.
Starting a home business with no money is difficult, but by no means impossible. You just need partners and a great deal of trust.
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