The reality is that banks, even community lenders, are hesitant to lend to startups. Buying a homebased franchise opportunity may boost your financing chances, although lending to homebased entrepreneurs isn't an industrywide practice, says Ginny Young, president of Orange, California, franchise lender Brava Capital. Her company doesn't finance homebased borrowers, but she knows industry peers who are funding cleaning service franchisees, some of whom may start out as homebased enterprises. "It would be easier to get that financed than a [homebased] mom-and-pop cleaning service," she says.
Even so, the franchise lender still needs assurance that a homebased franchisee has adequate capital levels. Says Young, "A homebased business is not a lender's dream unless it's an SBA loan and [the entrepreneurs] have equity in their house and a good business plan."
Opportunities that homebased entrepreneurs purchase, however, are a different story. "If it's not a franchise, then somebody is getting paid by the new business owner to help them do something, but they're not regulated. It's not an attractive thing for a lender to bite their teeth into," Young says.
Any homebased company has the added burden of establishing legitimacy. But while many lenders have stereotyped homebased businesses as half-serious endeavors, views are changing. Tim Jochner, chair of Innovative Bank, formerly requested photographs of a homebased office. "We always got a picture of a desk and a computer," he recalls. "If the financial institution is going to look seriously at the business, it's not going to with a picture. It's going to be with a business plan. Anything you've done to show you've made a commitment is a benefit." For instance, detailing why your business is better than a competitor's will make an impression, he says. Letters of intent from customers, client references, a floor plan and evidence the firm meets licensing requirements further enhance a credit proposal.
A business plan, meanwhile, serves as the primary link to financing. "I can talk with my banker personally, but the loan committee won't have that information unless it's written in ink," explains Larry Lee, business consultant for the Missouri Small Business Development Center in Kansas City.
In addition, entrepreneurs should consider a demonstration, says financial manager Frederick Scenna. Recalling a business plan from a cell phone product inventor, Scenna says, "When you read about the product, it just didn't make sense. But when he brought it in to show us, [I thought], 'That's a very cool product.'" Scenna, who advises homebased firms in the Philadelphia area, also recommends joining a local chamber of commerce, which typically provides free office space for business meetings.
Planning on using your own money to start your business on the cheap? Read Bootstrapping Your Business for crucial tips on making your low-cost venture a success.
All in the Family?
Is it okay to use a family loan to fund a homebased business? As long as you stay on the IRS' good side.
Calling it a loan doesn't necessarily make it so in the eyes of the IRS, warns Larry Lee, business consultant for the Missouri Small Business Development Center in Kansas City. "The IRS has strong opinions about low- and no-interest loans among family members. When loans are made below market rate or at no interest, it could be subject to the federal gift tax."
Stay on the agency's good side by formalizing loan agreements, which lets you reap tax benefits available to other business borrowers. Put the deal in writing to demonstrate the interest is a legitimate business deduction. Says Lee, "Know the parameters so you don't get yourself into trouble and have to pay the gift tax on something that truly was a loan."
If the family contribution wasn't intended as a loan, entrepreneurs can avoid the gift tax by accepting no more than $10,000 from a parent. "My mother could gift me $10,000," Lee explains. "My father could gift me $10,000, my mother could gift my wife $10,000, and my father could gift my wife $10,000. There's $40,000 [in business funding] you can do with a gift."