Hidden Treasures Where to find the funds to finance your homebased business.

Money isn't everything, but you can't get startedwithout it. Once you know how much money you'll actually need,there are plenty of places you can turn. In fact, you may alreadyhave access to the only sources you need.

"While a homebased business requires less start-up capitalthan a traditional office, remember that you still need money tostart your business and support ongoing expenses, such as an extraphone line, stationery, advertising and inventory," says AlonaSussman, a certified financial planner in Chicago. Sussman suggestsacquiring at least six months' worth of working capital beforestarting your business. "This financial cushion will help yousurvive the time from when you open your doors to when your firstrevenue check arrives."

Plan Ahead

By planning ahead and considering your financial options, youcan determine which sources will help you build your business andensure your future success. Use the following tips to find thefinancing that will help you build and grow your homebasedbusiness:

• Create a business plan to determine how much money youneed. Setting up a business plan helps you figure out whichfinancial resources will meet your needs, Sussman says, andimpresses upon potential lenders that you're serious about theventure. "If you need $1,000 to buy a computer, you willchoose different sources than if you need $50,000 to buy afranchise," she says. A credit card, for example, couldprovide the cash you need for a computer, but it wouldn't helpyou come up with a franchise fee. A home-equity loan, on the otherhand, would be overkill if all you need is a few hundred dollars toprint marketing materials.

• Conserve your available funds to make the most of the moneyyou have. As a seasoned homebased-business owner, Chuck Randahas found that conserving financial resources is another way togenerate funds for his business. For 18 years, Randa has owned andoperated Whiteface Chalet, a Swiss-style inn in Wilmington, NewYork. By doing all his banking with the institution that holds hismortgage, and by negotiating with a small-business specialist atthe bank, Randa has been able to negotiate for specialized servicesthat are tailored to his business's financial situation."The bank allows us to skip a mortgage payment in our twoslowest months, May and June," he says. In exchange, Randaagreed to a longer term for his loan. "And when we explainedour business to the bank, they also offered us a free checkingaccount and a safe deposit box, saving us even moremoney."

During the first two years of operation, Randa paid anaccountant $7,000 to complete a monthly financial report for him.He saved money the next two years by learning to compile his ownreports. "My computer cost $2,200, but I saved $3,000 thefirst year and $4,000 the second year as I continued to learn theaccounting tasks."

• Pool your resources. Assembling a variety of financingsources can help you build your credibility as a viable business,which also increases your likelihood of receiving financial helpfrom additional sources, according to Claudette Hayle, president ofThe Hayle Group, a New York City financial and managementconsulting firm that specializes in helping small businesses obtaincapital. "Many financial sources don't want to be the solelender," Hayle says. "You are much better off ifyou're able to acquire seed capital through friends, family orother sources rather than going to a bank as a business owner withno capital. If the bank sees that you've already acquired somefunding, they often feel that you have an investment to protect. Abank that may not be as inclined to lend you the full $100,000 youneed could give your package a more serious look if you come upwith the first $40,000."

At Your Fingertips

Here are some sources of quick money already at yourdisposal:

• Use your credit card for a short-term loan. Scott M.Kahan, a certified financial planner and president of FinancialAsset Management Corp. in New York City, purchased a $3,300 laptopcomputer for his business two years ago by charging it on a creditcard. Because the credit card offered zero-interest financing forthe first six months and 6.9-percent interest for the next sixmonths, Kahan was able to take a year to pay off the purchase. Ifthe debt had lasted longer, Kahan would have transferred thebalance to another credit card rather than incurring a higherinterest rate. "Assuming you have a good credit history,you'll constantly receive offers for low-interest credit cardsin the mail," Kahan says. "By looking at these todetermine the best offer, you'll discover that usinglow-interest credit cards can be the cheapest financing you'llever see."

He warns, though, that while "credit card loans" beginas accessible, low-interest funding, their introductory interestrates often rise as high as 15 percent to 18 percent within sixmonths. "Often, the bank will lower the introductory rate overthe phone, either by extending it or by allowing you to transferyour existing balance to a different account--possibly a gold orplatinum account--where the rate is lower." Sometimestransferring from one account to another and then back to the firstwill help you keep the lower interest rate.

• Borrow from a 401(k) or a company pension plan. Ifyou're starting your homebased business to provide a secondincome, consider borrowing against your 401(k) or company pensionplan. "It's very common for such plans to allow you toborrow a percentage of your money that doesn't exceed$50,000," says Vickie Hampton, a certified financial plannerin Austin, Texas. "The interest rate is usually about 6percent with a specified repayment schedule. The downside ofborrowing from your 401(k) is that, if you lose your job, the loanhas to be repaid in a short period of time--often 30days."

• Use the funds in your individual retirement account(IRA). Within the laws governing IRAs, you can actuallywithdraw money from an IRA as long as you replace it within 60days. "This is not a loan, so you don't payinterest," Hampton says. "This is a withdrawal thatyou're allowed to keep for 60 days." She says it would bepossible for a highly organized entrepreneur to juggle funds amongseveral IRAs. "But if you're one day late--for anyreason--you'll be hit with a 10-percent premature-withdrawalfee, and the money you haven't returned becomestaxable."

• Use your other investments as a resource. Another way tosqueeze start-up cash out of your investments is to take a loanagainst your stocks and securities. Low-interest margin loansagainst stocks and securities can be arranged through yourbrokerage accounts.

"The downside here is that, if the market should fall andyour securities are your loan collateral, you'll get a margincall from your broker, requesting you to supply morecollateral," Hampton says. "If you can't do thatwithin a certain time, you'll be asked to sell some of yoursecurities to shore up the collateral."

• Use a home-equity loan as a cash source. A home-equityloan has many positive aspects as a potential cash source, Hamptonsays. Home-equity loans carry relatively low interest rates, andall interest paid on a loan of up to $100,000 is tax-deductible.But be sure you can repay the loan--you can lose your home if youdon't. "Depending on the value of your home, a home-equityloan could become a substantial line of credit," Hampton says."If you have $50,000 in equity, you could possibly set up aline of credit of up to $40,000. The only drawback is that yourhouse is put up as security, and you can lose your home if theequity is not repaid." Borrowing against home equity is nowallowed in all states except Texas.

• Borrow against cash-value life insurance. Hampton saysyou can use the value built up in a cash-value life-insurancepolicy as a ready source of cash. The interest rates arereasonable, because the insurance companies always get their moneyback. You don't even have to make payments if you don'twant to. Neither the amount you borrow nor the interest thataccrues has to be repaid. "The only loss is that, if you dieand the debt hasn't been repaid," Hampton explains,"that money is deducted from the amount your beneficiary willreceive."

Outside Sources

Here are some sources you might have overlooked:

• Borrow from friends and family. "If you'remarried and your spouse has a good job, your spouse's incomecould bankroll your business so you won't have to seek anyother source," Sussman says. "This can be the bestfinancial solution, because you don't have to qualify, theinterest rate is low or non-existent and your spouse probablywon't penalize you for late payment."

Borrowing from friends and family is another viable option,particularly if you're unable to qualify for other types offinancing. "I advise clients to hire an attorney to formalizeand legalize such loans rather than accepting a handshake to sealthe agreement," Sussman says. The legal document shouldspecify who the responsible parties are, indicate a repaymentschedule and note any extenuating circumstances. For example, aclient of Sussman's lent money to his sister. A clause in theircontract states that, if the sister sells her home, the loan mustbe repaid immediately.

• Apply for a grant. Depending on the type of business youstart, you may qualify for a grant. Grants may sound appealingbecause they offer a lump sum of money and usually require nopayback or have lengthy payback schedules. But they are difficultto find and difficult to qualify for. "As cushy as they sound,grants are the hardest kind of money to get," Sussman says."They're highly competitive, and you have to answer manyquestions to prove the validity of your business. Also, theapplication process is long."

When Hayle put together the financing package for the LongIsland restaurant Naisiki International, she knew the restaurantwould offer 40 new jobs to an economically deprived area. She wasable to acquire a $500,000 loan from the Urban Development Corp. inNew York City. She also persuaded the town of Hempstead, New York,where the restaurant would be located, to contribute a $200,000grant.

While not many grants are available to start-up companies, Haylesays, community development grants are worth a look. "If youfeel like your future business could contribute to communitydevelopment or empower a group of economically deprived people,visit your state economic development office to find out whichprovisions are available," she says. "Be aware of thegrant cycle; organizations take in proposals and review themannually or biannually." With grants as well as loans, Haylesays that, if you have already acquired some funding, you are morelikely to receive serious consideration and, ultimately, thefunding you're seeking.

Keep It Official

Borrowing money from family and friends can be tricky business.To ensure that your friendly relationships stay that way, treatsuch loans as professionally as you would a loan from any othersource, advises Randall Mackey, president of Mackey, Price andWilliams, a corporate and securities law firm in Salt Lake City.Either draft and sign a written agreement yourself or ask anattorney to draw up a contract for you.

Mackey recommends that basic terms of the contract include theamount of money to be borrowed, the date when it should be paidpack, whether payments should be made in installments or with alump sum--or even repaid on demand.

The best way to avoid problems is to discuss with your friend orrelative what each of you expects from the transaction. If youdon't want them involved in your business, make it clear in thebeginning--and get your terms in writing. If he or she needs morereassurance that the money is being well-spent, agree to furnish abusiness plan or to provide "progress reports" atagreed-upon dates. Whatever your arrangement, putting it on paperwill reassure you both that you have the control you need over yourinvestments.

Worth Reading

Government Giveaways for Entrepreneurs, by Matthew Lesko(Information U.S.A., $37.95, 301-924-0556). This book lists grantsand other government funding sources and tells you how to apply forthem.

Getting the Money You Need, by Gibson Heath (IrwinProfessional Publishing, $35, 800-634-3966). This book offerssolutions and advice for finding the money you need to turn yourbusiness idea into reality.

Money Talk

The National Federation of Independent Business (NFIB) inWashington, DC, a small-business lobbying organization, offers afree booklet called "Small Business Financial ResourceGuide." Its Web site (http://www.nfibonline.com )includes helpful information for acquiring capital and contactinformation for NFIB state offices. For more information, call(800) NFIB-NOW, or write to 600 Maryland Ave. S.W., #700,Washington, DC 20024.

Carolyn Campbell, a home-office entrepreneur for 20 years, haswritten more than 200 magazine articles.

Contact Sources

Financial Asset Management Corp., 220 Fifth Ave., 13thFl., New York, NY 10001, (212) 679-8200

University of Texas, Department of Human Ecology, GEA117, Austin, TX 78712, (512) 471-5808

Whiteface Chalet, P.O. Box 89, Wilmington, NY 12997,(518) 946-2207