Best Sources for Homebased Expansion Capital
Q: My business is homebased. Will I be able to raise expansion capital?
A: Just because you own a homebased business doesn't mean you're out of luck when it comes to raising money from traditional sources. In fact, banks and investors generally don't care where you run your business, as long as you're making money.
Back at my old company, NetCreations, we got a $100,000 credit line from Citibank when we were still a five-person business operating out of my house. All the bank wanted to see was our previous years' tax returns and a list of our accounts receivable (customer payables). The same goes for investors, especially those who invest in startups and early-stage businesses. In fact, a savvy investor may like the idea that you're saving money on office space and investing it in people and products instead.
Here are five road-tested strategies to raise money for your homebased business:
- Bust open your piggybank. The first place to look for expansion capital is your own personal savings. After all, if you don't believe in your business strongly enough to invest in it, why should anyone else put money in? Personal savings typically consists of cash, stocks and bonds, home equity, an insurance policy or a retirement plan. But you don't have to sell your assets in order to tap your personal savings. If you own securities, for example, you may be able to borrow against them by taking out a low-interest margin loan with your stockbroker. If you own a home, you can take out a home equity loan on the part of the mortgage that you've already paid off. You can also borrow against cash-value life insurance, your 401(k) retirement plan and your individual retirement plan (IRA).
- Take out a credit line. While companies often take out bank loans to acquire property, equipment, furniture and other big-tickets items, businesses often turn to short-term credit lines to finance working capital needs. If your company has been in business for several years and you're showing consistent profits, you may be an excellent candidate for a credit line. Unlike a loan that locks you into monthly payments, a credit line allows you to withdraw money when you need it-say, to cover this week's payroll or to pay your bills until a big check clears-then replace the money when cash becomes available. You only pay interest on the money you borrow. While you may never have to use the line, you'll sleep better at night knowing that it's there.
- Put it on your card. Many successful businesses have financed their growth with credit cards. While banks generally want to see a two- or three-year track record of profitability before they'll lend you money, credit cards let you buy what you need right now. But beware: Though the low introductory rates can be tempting, eventually you're going to have to pay the piper-at rates that are often in the high double-digits. Credit cards should be used for routine purchases like office supplies and phone bills, not for buying big-tickets items like computers and office furniture.
- Go ask Mom and Dad. If you've exhausted your personal savings and you need more money than the bank or credit card company is willing to lend you, it may be time to look for outside investors. This involves selling a piece of your company in exchange for the cash you need to take your business to the next level. Friends and family are generally the best place to start when raising equity capital. They tend to ask fewer questions and are typically more concerned about helping you succeed than they are about getting a huge return on their money. On the other hand, if your business goes bust, you might not get invited to next year's Thanksgiving dinner.
- Talk to VCs and angels. Once you've tapped your friends and family, the next step is to approach angel investors-high net worth individuals such as your doctor, your lawyer or a successful businessperson in your community. Often, these angels form clubs and hold regular meetings to listen to companies' pitches. Companies looking for bigger infusions of cash often turn to venture capital firms-companies that raise money to invest in startups and small businesses with the potential for rapid growth. The advantage of taking venture capital is that it lets you grow your company faster and take bigger risks than you could afford to take on your own. The downside is that you may need to give away so much equity that there isn't too much left when you sell your company or take it public. Also, venture capitalists typically want to get their money in and out of your business in three to five years-whether you still want to run it or not.
Rosalind Resnick is the founder and CEO of Axxess Business Centers Inc. , a storefront consulting firm for startups and small businesses. She is a former business and computer journalist who built her Internet marketing company, NetCreations Inc. , from a two-person homebased startup to a public company with $58 million in annual sales.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.
For reprints and licensing questions, click here.