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.
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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.
Cheapskates!
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."
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