NEW: Jane Shelton

Getting finance may be the hardest task facing home-based business.

Finance is tricky for home business

Home business operators often tell me about their difficulties in getting credit when cash flow isn’t too good.

It can be very problematic unless you can offer the bank an asset as security for a loan. More often than not for the home business operator, the lending officer will seek security on your family home unless you have some other investment property that they can use to protect their interests.

This is why it is important to have a nest egg to guarantee start-up cash flow.

I’ve found that banks make an assessment about your personal creditworthiness and the ability of the business to generate cash flow. If you’re in the start-up phase, the news may not be good.

Bankers look at your personal credit history, especially if your business does not have a track record. The bank will ask you to list your assets — house, car, furniture and fittings, shares, bank deposits, term deposits, managed funds deposits and income sources. Then all liabilities — existing credit cards, store cards, mortgage, personal loans, car loans. And then they calculate your ability to repay.

If you come up as a good credit applicant, with minimal risk, the bank will lend your home business money. If the bank thinks you and your home business are too risky, they will not extend credit to the business. It is that simple. But they may extend your credit card limits — at a very high interest rate.

Watch out for the trap of using personal credit cards to fund business purchases without taking into account the long-term interest rate and the ability of the business to pay off large amounts.

If the bank cannot take your home as security it is likely to seek a personal guarantee on the loan from yourself or a family member. Home business operators tell me this is where its important to have good support networks within your family and can truly be a life saver for your home business. Banks tend to be a lot happier if your parents or partner agree to go guarantor.

When your home business is getting going, you’re likely to find that your bank manager has moved to another branch and you may have to start from scratch.

Types of finance for your home business include:

• Personal loan – not great for business purposes, but useful as will be based on personal ability to repay instead of the business.
• Bank overdraft – an overdraft is not designed to be a permanent loan. The overdraft is an amount that you can draw down on to use when cashflow requires it or liquidity is tight. You may find that you need some credit to tie you over slow payment by a creditor. In this type of situation an overdraft can be useful.

Redraw from your home mortgage – many home businesses find that redrawing from the home loan is a really good option for financing the business. The interest rate offered by the bank is usually the best rate to small lenders and because it is already established this minimises finance set up costs.

Second mortgage – has establishment costs and you need to take into account the drain on the household finances to support the business.

Business loan – tied to the business and its ability to repay. Banks may still want a physical asset to secure against or a personal guarantee from the home business owner.

Investment loan – tied to a particular investment for the business such as equipment or investing in shares or other financial investments.

From suppliers – terms of credit that are favourable, allows selling stock, gaining receipts prior to paying suppliers for the goods. Helps if you need the cash flow to get paid by your debtors early, but can be tricky to manage and you can get caught out if you expect payments that do not eventuate or arrive into the bank account on time.

Venture capitalists and angel investors – great it you are seeking to expand the home business. Most venture capitalists make their decisions to invest based on the people in the business, the proprietary intellectual property and the growth potential of the business. Venture capitalists may not be interested in a micro-business, unless there are lucrative intellectual property rights that can be captured and exploited.

Family investors – fantastic option for a home business. Make sure you arrange a formal agreement prior to accepting the loan. Your family can give you the best terms for a loan, even interest free. Make sure there is loan documentation or shareholders’ agreements in place in case things get difficult later on.

Selling equity in your home business. You’ll need to balance the desire to control your destiny and your business with the need to grow business. If you don’t want to bring in another decision maker, this is not the best option.

Dr Jane Shelton not only runs a business from home but is doing business research into people working from home. She is managing director of Marshall Place Associates, Melbourne’s independent think tank, and CEO (honourary) for ‘Life. Be in it.’ International. Shelton has a Doctorate in Business Administration at the Australian Graduate School of Entrepreneurship (AGSE) at Swinburne University of Technology after a Master of Arts in Public Policy at Melbourne University and a Bachelor of Business in banking and finance at Monash University.

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