Category: Invest in my business

If you’re seeking a loan to fund your small business, it’s important to know that nearly all lenders will require some form of collateral from you to secure the financing in order to minimize their risk and recoup their losses in the event that you default on the loan. While it’s common practice, it’s still important to understand all of the risks up front before seeking out funding that requires collateral.

What Is Collateral?

Collateral is defined as an asset that a lender accepts as security for a loan or other obligation. While this can take many forms, it’s important to note that there are two types of collateral: those assets that you own outright, and those that you have a loan against (for example, a mortgage on your house). 

The best asset to use as collateral will have a title of ownership attached to it — like a home, motorcycle, or watercraft. Land cannot be used as collateral, however.

The specific type of collateral required depends on the loan type. For example, for a standard small business loan, real estate is often used, but for equipment loans, the equipment is its own collateral.

Business inventory can also be used if you’re using a loan to purchase more, but lenders may be wary to allow this, because in the event you’re unable to sell your inventory, they will likely question their ability to as well and might not be able to recover the money they lend you.

There are other possibilities, including cash savings or deposits. Banks will typically always accept this option since it presents low risk to them and on the plus side, they often have the lowest interest rates attached. However, the obvious disadvantage is that you have the potential to lose this money if you default on the loan. In some cases, you can use accounts receivable, though this is not common for banks due to the potential difficulty of authenticating purchase orders.

How Much Collateral Do I Need?

Generally, collateral amount is determined by what’s known as the “5 Cs:” that’s credit history, capacity for repayment, capital, collateral type, and conditions (interest rate, loan terms, and loan amount). These take into account both the applicant’s financial health and the specifics of the lender’s requirements.

Before You Commit to a Loan That Requires Collateral…

Be Aware of the Risks

Putting up collateral like your home or car is a serious decision that shouldn’t be taken lightly, so make sure you are prepared to handle this worst-case scenario before closing on your loan. While not necessary, it can help to consult a financial advisor beforehand to determine your risk aversion.

Retain Your Records

One major problem business owners encounter is that they tend to overestimate the value of their collateral in comparison to banks’ more conservative market value assessment. If you don’t have a general idea of your assets’ worth, it can be helpful to consult an independent appraiser before applying for a loan, but you should be keeping track of all of your assets regardless. You don’t have to get super complicated — even a simple Excel spreadsheet with line items of all of your purchases clearly documented should be sufficient.

Negotiate If Possible

You may not always have this option depending on your financial standing and credit history, but if you qualify for a small business loan, you should be able to work out specific terms and conditions that make sense for your situation. It’s common — and often recommended — to compare rates from different lenders to find the right fit. 

Consider Alternative Options to a Loan

If a small business loan isn’t feasible or preferable for you, there are several other avenues to explore. There are home equity loans and home equity lines of credit (HELOCs) that allow you to use your home equity to access cash to fund your business. However, with both of these options, your home is used as collateral. HELOCs in particular usually have variable interest rates, meaning you won’t have a consistent monthly payment.

A business line of credit is another option that allows you to tap into funds and doesn’t necessarily require collateral if you have what’s considered an “unsecured” line. You have a draw period, or a specific number of years that you can tap into the funds. But with unsecured loans and credit lines, interest rates are typically much higher than those that require collateral.

Peer-to-peer lending is another emerging option that, as the name suggests, allows business owners to secure money from another individual. The often web-based formats of these lenders can make it a bit easier to get a competitive rate. The process is fairly straightforward: you share some information about your desired loan amount and business, and if accepted, you’re listed as an option for potential investors. 

Finally, if you want to use your home equity to fund your small business without interest or monthly payments, you may want to consider a home equity investment. While your home is the collateral with this option, you receive cash in exchange for a share of its future value, and once approved, can get the money you need in as little as three weeks. Plus, you can use the funds for anything you need them for: equipment, expansion, marketing, or whatever else you’d like. Take our five minute quiz and find out if a Hometap Investment makes sense for your business needs.

Is Hometap right for me?

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

Approximately 200,000 more businesses closed their doors in the first year of the COVID-19 pandemic than in a typical year. That’s one-third more closures than the annual average of 600,000 prior to the pandemic. 

In that time, one in four small businesses received financial assistance via the Paycheck Protection Program (PPP), a business loan program established by the U.S. government to help small businesses impacted by the pandemic cover payroll and applicable overhead. 

Yet, many of the financial struggles small businesses faced are unaccounted for. business owners tightened their budgets, reduced their own take-home pay, and dipped into emergency funds and personal savings to cover the costs of transforming their businesses — purchasing the equipment they needed to reopen safely and provide support for their employees.  

Two years later, nearly 85% of the businesses that temporarily closed their doors have reopened, though a typical business day looks a bit different than it did two years ago for many — whether it’s a significant change in staff size, a shift in products, or a heavy lean into online ordering and curbside services. 

While community members have shown up in droves to support small businesses throughout the pandemic, the challenges business owners have faced to stay afloat have frequently taken place behind closed doors.  

In observance of Small Business Week, we connected with different small business owners across the country — and across industries — to better understand what it’s taken to persevere through the past two years and come out on the other side stronger than before. 

These are their stories. 

Meet Nahika 

Nahika Hillery is an Austin, Texas-based chef and the owner of Kreyol Korner, a food truck and catering company. She left the medical industry in 2017 to start her business with the mission of bringing Haitian culture to the foodie capital. 

“2020 was like the beginning of our peak year in business,” says Hillery. “I’m talking our peak year, like bookings after bookings between corporate catering, private catering, and also weddings. So when the pandemic hit, I just received hundreds of emails of cancellations and my heart was breaking every single day to have to go into my email and see the cancellations and brides asking for refunds. And it just became a huge financial mess at that point to figure out what to do with losing so many gigs. My account was just literally depleting at the time to cover everything.” 

Like so many other business owners, Hillery closed her doors and kept her eyes on the headlines, waiting for the pandemic to blow over. When one month turned into two, she got to thinking. 

“I consider myself to be really good at pivoting. I can adapt well. So I’m like, how do I keep the business alive? Maybe in a different form that people are not used to. So I started to meal prep. It started off with my neighborhood. I just made a simple menu. And my neighbors came through; I was feeding 20 different families. My neighbors would tell their friends who would tell their friends and it ended up expanding all over Austin.”

While the food truck is still closed for walk-up service, Nahika’s team of four has grown to nine, and she joined Cook Unity, a chef-to-customer platform, to grow her food prep services.  

“The pandemic helped me understand that there’s other ways to connect people with the culture outside of just serving food from the truck. It’s taught me to always be ready for change.”

Meet Matt 

Matt Wood decided to open his own coffee shop because he knew he could deliver a product and a coffee community that the big chains simply couldn’t. Starting with a single shop on the South Shore of Massachusetts, Restoration Coffee offered sustainable specialty coffee by partnering with importers that worked directly with farmers. 

His shop took off quickly, and one location became two. When the pandemic hit, Wood knew he needed to adapt quickly. 

“At the very beginning of COVID, when that first started, it turned into a ghost town really 

quickly,” says Wood.  “We ended up closing for two days strictly because we wanted to reformat the shop. Our East Bridgewater location was actually set up really nicely, where we had sliding windows in the front. So we locked the front door and we did online orders only.” 

He knew that the move to online orders would be a gamble. It meant credit card fees, dealing with customers who were used to paying with cash, and potentially losing out on tips. But the gamble paid off.

“It was actually nice being able to implement online ordering. We’d have 15 minutes to be able to get people’s orders ready, rather than them standing in the line and causing backup. So it really worked out well.”

The local outpouring of support for small businesses like Restoration Coffee actually allowed Wood to expand to a third location, and today he employs 35 people among his three shops.  

“I think people really felt like they were helping. They were buying gift cards, they were really just trying to support us to keep going, because they could see a lot of bigger companies were collapsing at this time.” 

Meet Christine 

In December of 2015, Christine Azar took the leap from the corporate finance world into small business, opening a chocolate shop that specializes in fine, ethically-sourced chocolates. 

By 2020, Azar Indulgences had three locations in Portland, Oregon, offering chocolate, coffee and wine, and she was thinking about franchising when the pandemic suddenly forced her doors closed and put her plans on hold. 

“I closed my stores March 13th, 2020, and we didn’t reopen until November 15th of 2020,” says Azar. “Being closed for that period of time was not only heartbreaking because I wasn’t able to do what I love — because I love being in my store. And of course the financial impact… I wasn’t making money.”

Azar spent a lot of her downtime deciding what her next move would be. Her shops were located inside hotels, which added challenges to opening back up. 

In a weird twist of fate, one of the hotels’ restaurants wasn’t unable to reopen, so Azar was approached with the opportunity to reopen as a chocolate shop with breakfast offerings, and she took it. 

“We’re now known for our breakfast sandwiches, which, never in a million years did I think that was my thing,” says Azar. “I’m grateful because I think people understand that small business is important. It’s what keeps the economy going.” 

Meet Andrew 

For Andrew Hawes and his business, the pandemic created an entirely different struggle.

Hawes and his partner took over as co-owners of RJ Bradley’s Skis and Bikes shop in Littleton, Massachusetts just two months before the pandemic started — a business that had been around since 1955, and they had some impressive shoes to fill. 

In the infancy of their ownership, the pandemic hit.

“We were the lucky few… because we were a bike and ski shop — bikes were deemed an ‘essential business’ because they’re a mode of transportation,” explains Hawes, “so there was about a two-day period where we just had to figure out how to reinvent the business in 

some ways, and address the pandemic and some of the new realities of retail.”

Hawes closed down the shop for just two days, while they figured out how to reopen in a way that was safe for their customers and employees. The supplies, such as cleaning agents and masks, weren’t burdensome, but the way that they worked would need to evolve. Fitting ski boots takes place in close proximity. 

“We needed to buy twice as many chairs, twice as many fitting stations,” says Hawes.

Families stuck at home during the pandemic were looking for opportunities to get outside and get active — and RJ Bradley’s felt and saw immediate impacts. 

“The bike business has drastically grown to the tune of about six x. The ski business… we’ve basically doubled it,” says Hawes. 

But that’s where the challenges arise. The jump in demand coupled with the drop in workforce has made day-to-day operations a challenge. 

“We’ve been burning the midnight oil, you know, it’s been really hard and frankly, a bit of a strain on all of us personally to keep this thing alive and thriving. We’re truly overworked right now.”

Meet Joanne

At the start of the pandemic, Joanne Krapf was in one of the industries that took perhaps the hardest hit: meetings and travel. As the owner of a meeting center, Krapf managed seven conference spaces that were regularly booked nine months in advance. 

When the pandemic hit, she waited to see if the meeting industry would bounce back. She quickly saw the writing on the wall, and Krapf made a major pivot to focus on the creative outlet she’d turned into her side hustle: Happy Monkey Gifts. 

“We ended up closing the [meeting] business in September of 2020 and Happy Monkey became a full hustle. So that became my passion. And I love the creative side of it. I love bringing joy to people,” says Krapf. 

Her online gift shop offers a wide variety of products, from tumblers and cups to luggage tags, magnets, name tags, and candles. 

Shifting from in-person events to a business that’s largely online presented some unique challenges. 

“Customer service became really important, because customers can go anywhere. I had to get on Etsy and push that, but I love marketing and business development and that’s kind of my background.”

The pandemic provided Krapf the unique opportunity to lean into some of the creative hobbies she’d always been interested in: photography, graphic design, crafting, and marketing. 

Two Years In

When it comes to the support of the community, these five business owners had much of the same things to say: their neighbors rallied, showed up, and found ways to support their businesses in what sometimes felt like the end; purchasing gift cards, spreading the word over social media, and practicing immense patience as businesses pivoted and found their ways back. 

This Small Business Week, we thank the business owners that persevered and came out the other side stronger than ever. 

For those businesses still struggling to take off or recoup losses from the last two years, there are myriad funding options to consider. Our small business resources provide education on where to find grants, loans, and other financing solutions to fit your businesses needs. 

If it’s viable for you, bringing your side gig to the next level can be a great idea for several reasons. Not only do you have the chance to put more time and energy toward a beloved passion project, but it can help you bring in some extra cash until you are financially secure enough to make a go of it full time. However, there are some things to keep in mind if you’re ready to leave your nine-to-five job behind and take your side gig full time.

What is a Side Hustle?

Simply put, a side hustle is an interest or hobby outside of your primary job that you use to bring in extra income. These run the gamut from knitting and crocheting to dog walking, baking, or tutoring. Side hustles have become increasingly popular in recent years, and artists and creators have turned to many online marketplaces like Etsy and Society6 to showcase and sell their work to a global audience.

Ask Yourself the Important Questions

Before you dive in headfirst and dedicate yourself to expanding your gig, you should make sure it’s worth the effort and has a chance of success. Some questions to ask yourself include:

• Do you have enough leads and sales? 
• Do a sufficient amount of your leads convert into sales?
• Is your business profitable (or does it have the potential to be?)
• Can you scale successfully to reach your desired income level?
  • Look at your growth over time — specifically the last six months, to see if your side hustle is showing signs of long-term sustainable growth.
  • If you haven’t already and are able to, consider testing out your business on a small scale, like running an Etsy store or freelancing on Upwork to gauge demand.

Prepare for the Time Commitment — and the Extra Costs

Starting any business is difficult — and when you’re growing your side hustle while still working a full-time job, it might feel like you have two 9-5s. This is common and expected as you grow your new business, but that doesn’t mean it will be easy. It’s important to make sure you’re completely dedicated to pursuing this venture and ready to put the time and effort toward making it happen.

There are financial considerations to take into account as well — namely, how you’ll handle any benefits you may have been receiving from your full-time job, like health insurance and 401Ks/retirement funds, and the amount of extra money you may need to spend for things like gas or vehicle maintenance. 

To get a sense of the cost of living you may have to maintain when going from working for a company to working for yourself, this calculator can help you determine the ideal income level based on your location. If you’re not particularly attached to your current area, consider the possibility of relocating and operating out of a lower-cost region.

Build Relationships…and Find a Mentor

Before you dive in head first, it can be incredibly helpful to tap the knowledge and insight of someone in the field who can advise you of the perks and pitfalls that come along with your particular industry. 

Now is also a great time to attend networking events, reach out to virtual connections in your field, and get back in touch with past colleagues who may be able to provide guidance and support or refer you to resources and fellow professionals.

Create a Business Plan

If you’re ready to get serious about your side hustle, it pays off to create an official plan. Not only are business plans often required from financers and lenders to receive funding, but taking the time to consider your target audience, competitors, and product or service and go-to-market strategy will help set you up for success. This is also a good time to consider any potential lulls in income due to seasonality or geography and determine how you’ll account for these losses, if at all.

Standardize Processes and Procedures (and Automate Where You Can)

When you’re handling all of your operations by yourself, you have a bit more leeway with respect to how and when you organize and complete each task. However, as you scale and potentially hire employees to help you, consistency is key — and establishing clear rules and guidelines for new team members will help business stay on track while you grow.

Where possible, look at the critical processes that you might be able to automate with software as well. This will keep operations streamlined and save time otherwise spent training people, which can be especially valuable when you’re ramping things up.

Opt for Contractors Over Full-Time Employees (at First)

While it can be a bit more expensive to go this route, outsourcing contractors to begin with — even just one — is usually a better option than hiring full-time staff members for a few different reasons. It can save you time as you won’t have to train them, they typically specialize in one field, and it allows you to maintain a lean team until you absolutely need extra help. Eventually, if you reach a point where you are experiencing enough demand and bringing in enough revenue that you need to and can afford to bring on more employees full time, you can take that step more confidently. 

Establish (or Expand) Your Web Presence for Your Business

No matter what type of business you have, creating a website is key to helping you build credibility and bring in more customers. It doesn’t have to be anything fancy — and today, many free website builders like Wix and Squarespace make it easy to get a simple site up and running. If you sell goods, consider integrating ecommerce capabilities through a platform like Shopify to let customers purchase directly through your site.

Are you a homeowner that could use some funding to get your side hustle up and running as a full-fledged business? Take our five-minute quiz to see if a Hometap Investment can help you tap into your equity to get funding for your current or future needs.

Is Hometap right for me?

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

Are you considering entering the world of small business ownership by joining an established franchise? It can be a great way to explore entrepreneurship without the pitfalls that come with starting your own business venture from scratch. And while franchise fees and costs can cut into revenue, you can certainly turn a decent profit and make a good living: the average franchisee’s pre-tax annual income is $80,000. Read on to learn about how to buy into a franchise, as well as the pros and cons, financing options, and more.

What Is a Franchise?

When you think of a franchise, your first thought might be of a well-known restaurant or retail chain, but a franchise is just a business in which the owner has licensed the operation, products, and brand so that individuals can open additional locations in exchange for what’s called a franchise fee. 

Franchises differ from chains in that while chains are still completely owned, managed, and operated by the parent company, each franchise unit is owned by an independent investor. The franchisee pays royalties to the franchisor on a monthly or annual basis, but the amount varies by company; the typical range is 4–12% of total revenue.

Pros and Cons of Owning a Franchise

Buying a franchise can be a good idea, but like every financial decision, you need to consider what makes the most sense for you, your business goals, and your own personal situation.

Among the advantages of buying a franchise are that unlike a business you have to build from the ground up, a franchise has already been vetted and proven to be successful. You don’t need to create a business plan or test the product or service — the only major responsibility is to get the franchise up and running. 

Depending on the brand, there’s a high likelihood that you’ll benefit from name recognition as well. As a result, franchises frequently see higher profits than independent businesses. You may also be able to save money when it comes to buying supplies, as franchisees usually have the opportunity to purchase products in bulk at a deep discount.

Finally, you have a built-in network for advice since, unlike a business you’re beginning completely on your own, there are often hundreds (and sometimes thousands) of other franchisees that share your experience to consult, and nearly every franchise has ongoing support and training in various areas of the business. 

Of course, there are some drawbacks to joining a franchise. Regardless of industry, franchises frequently come with higher startup costs than those of an independent business — though some are less expensive than others, as you’ll see below. As part of the process of acquiring a franchise, you might be required to put a good amount of your own capital toward getting the business running, and as mentioned above, you’ll be paying a percentage of your revenue to the franchisor every month or year. 

While you’re operating your franchise independently, you’ll still be expected to follow the rules, standards, and approved processes of your parent company, so if you’re hoping to showcase your creativity and out-of-the-box ideas, a franchise may not be for you.

Buying and Owning a Franchise Business

If you’re seriously considering owning a franchise, one good first step is to attend what’s known as a “Discovery Day.” These are face-to-face meetings, typically held at the corporate offices of the franchise company, and are a great way for prospective franchisees to not only learn more about the business, but also for the franchisor to get a better sense of who you are and what you will bring to the table for their company. It’s important to note, however, that Discovery Days aren’t usually open to the public — once you express interest in being a franchisee, the company typically invites those who they believe will be the best match.

Another major factor to consider is location, as this can make or break a franchise business. You’ll want to think about areas that get a good amount of car and/or foot traffic, as well as any other nearby locations of the particular franchise you’re interested in — you won’t want to run the risk of losing business to a fellow franchisee, or taking business away from them.

Best Franchise Opportunities

Since it does cost quite a bit of money to start a franchise (the typical range for startup expenses is $50,000–$200,000), picking a type that is on the lower end can be advantageous and help you bypass costs you might otherwise put toward getting a more expensive franchise up and running. 

Currently, among the best low-cost franchises are Cruise Planners, a cruise-booking business you can run out of your home, Fit4Mom, a fitness franchise for moms, and Chem-Dry, a carpet-cleaning business.

While they may not be the cheapest to start, there are also more than a few franchises that tend to be the most profitable. You probably won’t be surprised to learn that half of the top 10 best franchises to buy are fast food businesses — including McDonald’s, Dunkin’, Popeyes, Sonic Drive-In, and Taco Bell. Others include 7-Eleven convenience stores, The UPS Stores, and hair salon franchises Great Clips and Sport Clips.

Regardless of the franchise you choose, you’ll need to build a budget that includes estimated costs and projected revenue. Consider additional expenses like marketing, utilities, and your own salary as well. Before you begin budgeting, it can help to talk to current fellow franchisees of the particular business, as they can provide guidance about realistic figures, along with any unexpected costs they faced.

Ways to Fund a Franchise

The process of securing a franchise loan or other financing is a bit different than other types of businesses, due to its fairly unique business model. You’ll need to make an initial investment, which includes the franchise fee, along with the costs to lease or purchase property, invest in necessary technology, hire staff, and set aside sufficient working capital.

A good place to start is with the franchisor themselves, as they may have a specific, established program that’s designed for the particular franchise and may include partnerships with lenders or direct capital. The major advantage with this option is that the funding you receive will typically cover most if not all of the initial investment required by the franchisor.

Outside of the franchisor, you have other financing solutions to consider. While there aren’t any dedicated franchise grants or loans, you can use a traditional loan from a bank or credit union or an SBA (Small Business Administration) loan. However, some of these loans have fairly stringent application and approval requirements, with significant red tape, and funding timelines can be quite lengthy.

There are also alternative franchise financing options to consider, including a home equity investment, which lets you tap into your home equity to get cash in a matter of weeks to cover your funding needs. With no interest or monthly payments, this can be a great choice if you’re hoping to maintain cash flow flexibility.

Are you a homeowner who is considering buying a franchise business? Take our five-minute quiz to see if a Hometap Investment might be a good solution to help you handle your startup costs.

Is Hometap right for me?

YOU SHOULD KNOW…
We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

If you’re a business owner, a grant might be something you’ve primarily associated with non-business initiatives, like art or nonprofit projects. However, government business grants and foundation-sponsored business grants can be an excellent way to get funding for a specific purpose as it relates to your company.

Simply put, a grant is a sum of money that’s given to a business in need or on a mission with a clear social, economic, or research focus. While there are government grants for small businesses issued by local, state, or federal branches — corporations and foundations also offer them. 

Grants are usually cause-based, supporting a particular initiative or focus that’s important to the organization, like research and development, minority- or women-owned businesses, etc. There’s no interest attached to the funding, and you aren’t expected to pay it back. While this concept of “free money” might sound too good to be true, it’s not. The only catch? Competition can be fierce, as the organization issuing the grant only has an allotted amount of cash to provide, which is typically either split between a small number of businesses, or given just to one.

There’s no question that grants can be incredibly valuable to small businesses — but as with any financing source, it’s crucial to do your research to determine if it’s the best way for your company to pay for its needs. Here’s everything you need to know before beginning the process of seeking grant funding.

Pros and Cons of Business Grants

There are benefits and drawbacks to grants. In contrast to loans and lines of credit, you aren’t required to pay the grant money back after you receive it. And because the money is awarded to you, there is no interest or monthly fees associated with it. In addition, the funds are usually provided in one lump sum, so you have access to all of it at once — an advantage if there is a particular item or initiative that you’re hoping to cover the costs for. 

Receiving a grant can also increase your chances of being approved for another one in the future, since it demonstrates your merit and trustworthiness to other organizations.

However, there are several factors to be aware of if you’re considering small business grants as a means of funding your business. One of the biggest disadvantages associated with grants is the length of time it can take to go through the process. While it depends on the organization, the timeline from application to funding can take as long as a year or more, since grants are evaluated subjectively by either a panel of reviewers or sometimes even individual staff members, especially if you’re dealing with a foundation or nonprofit with only a few employees. So if you’re hoping for fast cash, grants are generally not your best bet.

Another challenge is that unlike most traditional funding options, there can be some stiff competition depending on the grant, since there’s typically an allotted amount of recipients — and in some cases, only one. While you obviously can’t predict whether or not you’ll be selected, the more tailored the grant is to your business or the desired purpose of the funding, the better your chances are.

Finally, as mentioned above, business grants usually have a very defined purpose, and can’t always be used for anything you’d like. You’ll usually be required to put the money toward a designated area, like technology development, and will likely have to explain in the application process exactly how you plan to spend the money.

For businesses seeking a large sum of cash, a grant may not be the best option — or at least, shouldn’t be the only source of financing. The maximum amount you can receive varies by the organization issuing the grant. The Small Business Innovation Research (SBIR) grant, for example, can provide anywhere from $150,000 to $1,000,000. But most (especially those offered by local companies) tend to provide fairly small sums, from $10,000 to $50,000. Considering the drawbacks above, it typically makes the most sense to go the grant route if you’re seeking a relatively small amount of money for a very specific reason and feel that you can confidently demonstrate a clear need that stands out from that of other candidates.

How to Get a Small Business Grant

The application process and qualification criteria vary based on the organization that’s issuing the grant, but corporate grants are typically less stringent than government grants. When it comes to applying, it almost goes without saying that you should first make sure you meet all of the prerequisites — as some organizations have stringent requirements about number of employees or business type — and make sure you provide information that’s as complete and accurate as possible. Thoroughly proofread your submission and double check aspects or requirements that are easy to overlook but can instantly disqualify you, such as word or character count. Here are some other tips to keep in mind that can up your chances of acceptance.

Match the Mission

You should also make sure that your business aligns with the values and mission of the organization you plan on applying to. This will not only increase the likelihood that you’ll be selected as a grant recipient, but also help you to tailor your application to fit the requirements of the sponsor. As mentioned above, businesses that fall into a designated category — like women- or minority-owned, eco-friendly, etc. — often stand the best chance of qualifying for specialized grants, as there tend to be fewer companies that meet the criteria to apply.

Learn from Past Grant Recipients

If possible, another helpful step is to familiarize yourself with previous winners of the grant. Reading about those that were successful in receiving funding from the issuing organization can give you a huge leg up in terms of potentially understanding the values, qualities, and qualifications that may help you stand out from the pack. 

Focus on the Facts on Your Grant Application

Including numbers and figures is another great way to provide concrete proof that your business is deserving of the particular grant. For example, if you can show data that supports demand for your product and growth potential, this can illustrate your success in a direct and objective way and make your application that much stronger. If you’re looking for a startup or new business grant and don’t yet have these figures, going broader and citing more general statistics about your industry, like growth rate or market size, can work as well. 

Overall, a comprehensive and solid business plan can distinguish your company from the pack and better explain your needs. Now is also a good time to tout any awards or accomplishments you’ve won in the past; don’t be afraid to share examples of positive recognition that can convince the committee that your company has an established, positive track record.

Share Your Business’s Story

Don’t underestimate the power of telling the story of your business if it can strike an emotional chord with the organization or provide a compelling reason why the grant could make a difference for you, either. Some questions to consider as you craft your submission are: 

• Why did I start this business? 
• What kind of difference was I hoping to make or problem was I hoping to solve with my product or service? 
• Is there a particular event that happened or a challenge that I overcame that illustrates a particularly important aspect of my journey so far?

Plan Ahead

If there’s a recommendation component (which many grant applications require), it’s best to reach out to your contacts as far in advance of the deadline as possible so you aren’t stuck waiting for those endorsements to complete your submission. The same goes for any public or customer voting programs, which are an element of some applications; you’ll want to plan ahead to determine how and how often to encourage your customers to cast votes — like through a social media post on a daily basis, for example. 

Address Any Shortcomings

While you obviously don’t want to discuss the weaknesses of your business in depth, it can certainly help to get ahead of any potential questions that the organization might have about an aspect of your business that could require more explanation, like your business model, for example, if it’s complex or potentially confusing. Being as thorough and honest as possible can paint you in a more favorable light to the judging panel.

Leverage Your Connections

It may also help to acquaint yourself with the particular organization’s grant officer to build a relationship and gain insight into what they might be looking for from an applicant. Finally, while it’s not necessary for every business, it can be beneficial to bring in an outside expert — like a consultant or accountant — to advise during the process and review your application before you submit it to increase your chances of success. If you plan on applying for multiple grants, consider hiring a dedicated grant writer, who is experienced in crafting these kinds of applications. However, taking the time to research all of the potential grants available and selecting one or two that you feel you’ll have the best chance of winning can often be a better use of both your company’s time and money.

Even after you submit your grant application, it may be worth the effort to follow up with the organization once or twice, especially if the review period is lengthy. With so many submissions to sort through, this can go a long way to keep you top of mind and in good standing with those who are evaluating the applications.

Where to Find Business Grant Opportunities

If you’re looking for a grant, there are plenty of places to find options that may be right for you. While it primarily depends on the type you’re looking for, a good place to discover federal grants is grants.gov, which is a large, searchable database of opportunities, categorized by organization. The Small Business Administration website also has a handful of SBA grant programs listed that can help you narrow your search. While there are not SBA grants for starting or expanding a business, there are grants for nonprofits, resource partners, and educational organizations that support entrepreneurship. 

For regional or local grants, your state’s official web page will likely have a section for opportunities you can pursue. Of course, your own industry may have dedicated grants as well, so it’s worth a quick search for your particular field.

To get started with finding the best grants for your organization, here is a list of some specialized resources that may help you identify appropriate opportunities:

• Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Programs: Both the SBIR and STTR grant programs provide money to for-profit small businesses with 500 employees or fewer that focus on scientific or technological research and development for potentially commercial purposes.  
• Visa Everywhere Initiative: Expressly geared toward startups who are creating solutions in the commerce and payment spaces and open to companies around the world. 
• The Amber Grant Foundation: Women-owned businesses have the chance to receive $10,000 each month — and $25,000 in the month of December — through The Amber Grant Foundation. 
• Black Founder Startup Grant: If you have a legally registered business and identify as a Black woman or Black nonbinary person who is seeking investor funding for your company, you can apply to receive between $5,000 and $10,000 from the SoGal Foundation and its partners.
• U.S. Department of Energy (DOE) Grants: The U.S. Department of Energy gives grants to small businesses that are doing work in the fields of clean energy research and development. 
• The Military Challenge Award: Veterans, reservists and transitioning active duty military members (or their spouses) whose businesses have a social mission for the military community can participate in this pitch contest, sponsored by the Street Shares Foundation.
• Walmart Local Community Grants: This program, sponsored by Walmart, is specifically for community-focused non-profits, and provides $250 to $5,000 to selected recipients.
• Nike Community Impact Fund: This partnership between Nike and the Charities Aid Foundation of America, gives grant money to urban nonprofits that serve their communities through sports programs. 
• National Institute of Health (NIH) Grants: For small businesses with a focus on biomedical or behavioral research, the National Institute of Health has thousands of grant opportunities listed on their website. 
• Economic Development Administration (EDA): Regional and national economic development projects can receive funding for projects from the EDA, a subset of the Department of Commerce. 
• Small Business Development Centers (SBDC): In addition to your state website, SBDCs can also help you find local opportunities.

Free business funding is free business funding, so small business grants are a worthwhile option to pursue. However, due to the stiff competition and often lengthy funding timeline, if you need additional business funding, grants shouldn’t be your only plan. If you’re looking for alternative funding beyond small business loans, perhaps because you haven’t been in business long enough to qualify, you do have more options. If you’re a homeowner, your home equity could provide the extra funding you need to launch or scale. Here are four ways to access that equity. 

• Home Equity Loan for Business Funding

A popular option for many homeowners, a home equity loan lets you borrow against the equity in your home — with the home serving as collateral. One advantage is that your monthly payment will stay consistent every month due to fixed interest rates. Plus, repayment periods range from 5 to 30 years, giving you time to pay the money back, and the interest that accrues on your equity may be tax deductible. But it’s important to remember that a home equity loan is a second mortgage on your home, so you’ll be responsible for another payment every month beyond that for your original mortgage. Finally, while application and approval requirements differ by lender, some can be quite stringent and restrictive, making the process difficult.

• Home Equity Line of Credit (HELOC) 

A HELOC can be fantastic in terms of flexibility for your business, because it gives you access to your home equity in the form of a credit line from which you can borrow as much money (up to a maximum) as often as you want without being penalized. Like home equity loans, the repayment periods are typically flexible, ranging from 15 to 20 years. However, HELOCs usually have variable interest rates, so your payments have the potential to fluctuate every month, which can be a disadvantage if you want the peace of mind that comes with predictability. You also run the risk of having the credit line frozen by the lender if your score or home value drops too low.

• Cash-out Refinance

A cash-out refinance replaces your original mortgage with one with a balance larger than what you owed, giving you the difference. There are advantages to this option, including the opportunity to secure a lower interest rate on your mortgage. But it’s important to remember that since it is a new mortgage, your payoff timeline will be extended and you’ll have to pay application, closing, origination, and potentially  appraisal fees.

• Home Equity Investment for Business Funding

There’s an alternative option to a business grant that also gives you money in a lump sum, can provide you with cash in as little as three weeks, and allows you to use the money however you choose — without the fierce competition and uncertainty that can come with the grant application and selection process. A Hometap Investment lets you tap into your home equity to get cash in exchange for a share of your home’s future value, without interest or monthly payments.

See if a Hometap Investment might make sense for your business needs. Take our five-minute quiz and find out today. 

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We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

Working for yourself can be fantastic for a number of reasons — but when tax time comes around, things can get tricky because unlike employees who receive W-2s, taxes aren’t automatically deducted from your paychecks when you’re self-employed. While you should consult a tax advisor for the specifics, here are some things to consider as tax season gets underway.

How do you know if you’re technically self-employed or not? The IRS classifies self-employment through the following criteria:

• You carry on a trade or business as a sole proprietor or an independent contractor.
• You are a member of a partnership that carries on a trade business.
• You are otherwise in business for yourself (including a part-time business).

The window to file your taxes in 2022 extends from January 24 to April 18 for all taxpayers, whether self-employed or not. However, there are some important differences between filing taxes as a self-employed individual and a company-employed individual that you should be aware of before you begin the process.

Key Differences for Self-employed Taxpayers

You’ll likely need to file an income tax return if your net earnings from self-employment were at least $400. You’ll also be required to pay a self-employment tax in addition to income tax. The self-employment tax rate is 15.3%. It’s important to note that this percentage breaks down into two elements: the social security tax (12.4%) and the Medicare tax (2.9%).

Before you file, you’ll also need to determine your specific tax rate, and whether your area has specific city taxes you’ll need to pay. To figure out your tax rate, you’ll first need to find your net profit or net loss from your business by subtracting qualified expenses from your income.

It’s important to note that typically, 92.35% of your net earnings are subject to self-employment tax. Once you calculate this portion of your own net earnings, you can then apply the 15.3% tax to this amount to get your self-employment tax total. 

In order to file taxes when you’re self-employed, you’ll need to have a social security number (SSN) or, if you are a nonresident or resident alien, an individual tax identification number (ITIN). For certain types of businesses, you may need a tax ID number (also known as an Employer Identification Number). It’s free and easy to obtain one.

If you operate your business as a sole proprietor, you’ll need to use the Schedule C (Form 1040) to report your income and expenses and file your annual tax return.

Ways to Save Money When Filing Taxes If You’re Self-employed

It might be possible to save money when filing taxes, but it’s important that you first understand the difference between tax deductions and tax credits to decide which applies to you.

A tax deduction is only able to lower your taxable income, as well as the tax rate that is used to calculate your tax, and this can lead to a more significant refund on your withholding. 

A tax credit, on the other hand, actually decreases the amount of tax that you owe. So while you’ll also receive a larger refund on your withholding, you may also receive a refund without a withholding, depending on the particular credit.

These are some common deductions:

• If you recently started your own business, you may be able to deduct the startup expenses, like legal and marketing costs, from your tax bill. You can expect to deduct up to $5,000 in business startup costs and up to $5,000 in organizational costs, but only if your total startup costs are $50,000 or less. Start-up costs don’t include deductible interest, taxes, or research and experimental costs. 
• If you use a vehicle to travel for specific job-related purposes, you may be able to deduct up to $25,000 in costs, plus mileage expenses. 
• If you have a dedicated home office, you may be able to deduct rent/mortgage, property tax, and utility costs based on square footage. 
• If you use any specific supplies or equipment that are critical to your job functions, you might be able to deduct their costs.
• Even though you’re required to pay the full Social Security and Medicare tax, you may be able to write off half of this amount at the end of the year.
• If you pay health insurance premiums, you may be able to deduct these costs.
  

Self-employed Tax Checklist

Here’s a quick checklist to help you prepare to file your taxes for the first time as a self-employed individual. (Here’s a free, print-friendly version of the tax checklist, too). 

Gather these items:

• Personal records (full legal names, SSNs, addresses, percent ownership, etc. for you and any other business owners)
• Your 2021 federal and state tax returns
• Your current financial statements and bookkeeping records
• Income records, including 1099 forms if applicable
• Estimated tax payments
• General ledger

Gather information about your possible deductions:

• Advertising and promotion
• Business insurance, loan interest, and bank fees
• Charitable contributions/donations
• Education expenses
• Equipment purchases
• Health care expenses
• Home office
• Internet and cell phone
• Legal and accounting fees
• Office supplies
• Qualified business income (QBI) 
• Rent (for office space or equipment) 
• Retirement plan contributions 
• Taxes and licenses
• Travel vehicle (for business use only) 

File your taxes:

• Tally your revenue, losses, deductions, and credits 
• Determine your tax amount by applying the 15.3% self-employment tax rate to 92.35% of your net earnings
• Get a free Tax ID Number/EIN
• File your annual tax return using Schedule C (Form 1040)
  • File form 1120S for S-Corps
  • File appropriate form if LLC (form will depend on LLC type) 
• If you run into any issues or have specific questions, consult a tax professional to help you or file on your behalf. 

If you’re a self-employed homeowner and you owe more than you expected in taxes this year, your home equity might be able to help you handle the cost without taking on more debt. A home equity investment can provide you cash in as little as three weeks, with no interest and no monthly payments, and doesn’t require a W2 to qualify.

Request an estimate to see how much of your home equity you could access in just a few minutes.

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The information above is intended as a basic summary of some tax issues to think about as a self-employed individual. It is not intended to be tax advice, as everyone’s tax circumstances are unique. If you are self-employed and have questions about your taxes, seek help from a tax professional.

If you’re a business owner who collects payments from customers through invoicing and is looking to free up a significant amount of cash without having to take out a loan, both invoice financing and invoice factoring can be great options for you. However, it’s important to first understand the differences between the two, as well as the pros and cons of each, and additional financing choices to consider before you decide to go with one or the other.

What Is Invoice Factoring?

Invoice factoring is an alternative to a loan that allows you to sell your invoices at a discounted price to a designated factoring company and receive a lump sum of cash in return (typically 80–90% of the invoice totals) minus a fee set by the company. Once your customers pay the invoice factoring company — which usually takes anywhere from 30 to 90 days — you’ll receive the rest of the invoice amount from the company, most commonly as a direct deposit into your bank account. The seamless process makes it fairly quick and simple to begin using the money for working capital in a relatively short period of time.

What Is Invoice Financing?

Invoice financing differs quite drastically from invoice factoring in that you’re not selling the invoices like you are with invoice factoring, and you’ll still be dealing directly with your customers. You’re receiving what is essentially a short-term loan from a lender and pay a percentage of the invoice amount as a fee for borrowing the money.

This option, also known as accounts receivable financing, can be a better choice for your business if you’re concerned about the potential ramifications of shifting the responsibility of invoice collection to an outside company and/or don’t want your customers to have to deal with an outside vendor, especially if your business relies on building and maintaining a relationship with clients.

Pros and Cons of Invoice Financing and Factoring

The primary advantage of both invoice factoring and financing is that they allow business owners to maintain cash flow, handle the payment of bills, and pay out their employees quickly, without the need to wait for outstanding client invoices to be dealt with first. This is often a step that can cause frustration and delay for many companies that frequently find themselves waiting for clients to settle their balances. The application and approval processes are often quicker and easier than that of a loan as well, typically just requiring a credit check to verify that your business is financially stable. Along with an application-to-funding timeline of around one to three months, they can be fairly quick ways to access cash compared to other financing methods that have lots of red tape and stringent qualification criteria.

In addition, factoring and financing are considered “unsecured,” so it doesn’t require any collateral to guarantee the funding beyond the invoices.

The biggest con of using either of these funding sources is the cost, as they can be quite expensive compared to other financing choices. Since you’re paying a premium to have the money given to you, and the financer is taking on risk by attempting to collect from your customers or provide you with the cash up front, you won’t receive the full sum of the invoices and they’ll receive a cut of the total. In addition, you may need to end up buying back the invoices that aren’t collected or agree to a recourse situation. Depending on the company you go through, extra fees usually range from 1-5%, but for financing providers who bill per total invoice value per week, this can balloon into massive APRs of nearly 80%, so it pays to do your homework on the specific lender. 

With invoice factoring specifically, you’ll also need to be comfortable relinquishing control over your invoices and involving a third party — once you sell your invoices to them, your customer will need to work directly with that company to handle the payment of their invoice. Depending on your industry and the nature of your relationship with your customers, this can potentially have a negative effect on your future interactions.

Of course, your business also needs to collect invoices from vendors or clients for factoring to be a viable choice; if you rely on a different method for payment, you won’t be able to consider this option.

Who Offers Invoice Financing and Factoring?

For invoice factoring, you’ll need to work with a specialty factoring company, as this service isn’t offered by traditional finance providers. Similarly, invoice financing is typically not available through banks and credit unions — but some online lenders and fintech companies provide it.

Alternatives to Invoice Financing and Factoring

If you’re a homeowner who doesn’t feel like invoice factoring or financing is right for you or you’re having a hard time finding a company that’s a fit, there are more than a few other ways to access cash for your business, specifically through your home equity.

Home equity loan alternative

With a home equity loan, you borrow against the equity you’ve built in your home with the house serving as a guarantee on the loan. Unlike a business line of credit, you aren’t required to pay the balance down to zero every year. There are several other advantages to this option, including a fixed interest rate, consistent monthly payment, and flexible repayment period that typically ranges from 5 to 15 years. There are downsides to be aware of, however. Since a home equity loan is another mortgage on your home, it means another payment you’ll need to make each month on top of your first mortgage. And depending on the specific requirements of your lender, the application and approval process can be quite lengthy and challenging.

Home equity line of credit (HELOC) alternative

A HELOC lets you access funds whenever you’d like, and you can take out as much as you want — up to the maximum amount you qualify for — without any penalties. Compared to a loan, application and approval might be a bit easier, and repayment timelines are usually between 15 and 20 years. On the other hand, HELOCs have variable (read: unpredictable) interest rates, so your monthly payment can fluctuate significantly. You also run the risk of having your line of credit frozen by the lender if your credit score or home value drops below a certain threshold.

Cash-out refinance alternative

A cash-out refinance essentially replaces your current mortgage with one that has a larger balance than what you owed and provides you with the difference. While you have the opportunity to lock in a lower interest rate with a refinance, you are paying off a new mortgage, so this option lengthens your timeline and you’ll run into the same fees you dealt with the first time around.

Home equity investment vs. invoice financing

A home equity investment lets you access the equity you’ve built in your home and gives you cash in exchange for a share of the home’s future value. You can get the money in as little as three weeks and use it toward whatever your business needs, without the hassle of interest or monthly payments. 

Take our five-minute quiz to find out if a Hometap Investment might be a good fit for your business as an alternative to invoice financing or factoring.

Is Hometap right for me?

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

 

If you own a business, you already know the importance of maintaining your cash flow no matter what stage your business is in. Understanding all of your funding options is crucial, so that when your business requires an influx of cash, you can make the best decision possible. Below, we’ll cover everything you need to know about business lines of credit and how they work. 

A business line of credit provides a business with funding that can be used for any expense they choose, from equipment purchases to office space. While they may seem less common than loans or credit cards, according to FitSmallBusiness, nearly half (47%) of small businesses have opened a line of credit. 

What’s the Difference Between a Business Line of Credit and a Business Credit Card?

While business lines of credit and business credit cards are similar, they aren’t the same. With a line of credit, you have a draw period, or a specific number of years that you can tap into the funds. A business credit card, like a line of credit, has a maximum limit, but does not have a draw period, so you can maintain your account for as long as you’d like.

However, unlike a business credit card, a business line of credit is revolving. This means that you can use the funds up to the approved limit and, once you pay it off, you’re able to begin taking out money again. Some lenders charge a draw fee each time you access the credit line, and while APRs can be high, you only pay interest on the funds you use — this is a huge plus and can save you quite a bit in interest compared to other financing methods like a loan. 

In addition, the repayment schedule varies by lender, but is typically weekly or monthly. Business lines of credit are offered through many traditional financial institutions like banks and credit unions, but are also available through some online lenders. Many business lines of credit limits are also higher than those of credit cards, which can be an advantage if you’re seeking funding for a larger expense. A business line of credit can also cover expenses that might not be as easy to charge on a credit card, like rent or payroll costs.

This option also differs from a personal line of credit in that it’s connected to your company rather than you as an individual. This can be a positive or negative depending on how long your business has been running and your financial history, as you’ll need to show proof of strong revenue and business credit history in many cases, which is often tough for businesses that are just getting started.

There are two types of credit lines: secured and unsecured (sometimes referred to as non-secured). A secured credit line requires collateral — like a home — to guarantee it, whereas an unsecured line does not. While the approval criteria for unsecured lines of credit may be more stringent since it’s a riskier proposition for the lender, most business owners prefer this option for the obvious reason that there are no assets at stake. If you end up defaulting on a secured line of credit or are delinquent on your payments after a period of time specified by your lender, they may take ownership of the collateral and liquidate it to handle the balance owed.

How Much Money Can I Access and How Do I Qualify for a Business Line of Credit?

To determine how much money you may be able to access for your business through a line of credit, you can start by taking your estimated annual gross revenue and divide it by 365 to figure out your daily cash need. Then, total your number of accounts receivable and inventory days on hand, and subtract your accounts payable days on hand to get your usage. Finally, multiply this number by your daily cash need to get an estimated line of credit maximum.

While requirements differ by lender, you usually need to be in business for at least six months, have at least $25,000 in annual revenue, and have a minimum business credit score of 500 to qualify. You’ll also need to provide documentation that may include financial statements like balance sheets and tax returns.

Pros and Cons of a Business Line of Credit

Business lines of credit come with both pros and cons, like any financing option. 

Pros

• Flexibility: One big advantage is that you have quite a bit of flexibility in terms of access and use: a line of credit is revolving, meaning that once you access the maximum amount you’ve qualified for and repay it, you’re able to begin taking out money again right away. And unlike traditional financing options like a loan, you don’t necessarily have to specify what you plan to put the funding toward when you apply for a line of credit.
• Cash Flow Maintenance: A business line of credit can also help you maintain a healthy cash flow and timely payment of your bills, especially if you opt for automatic payments, which can lead to discounts from the lender. With the ability to take out as much money as you want up to the maximum amount, as often as you’d like, it helps you avoid the risks of overspending with a lump sum. This can be more advantageous than receiving a single payment for some companies as well, especially if your needs are spread out over a longer period of time. For example, if you’re planning a lengthy construction or renovation project where you’ll need more infusions of cash at different points, a line of credit might make more sense than a one-time loan.
• Future Financing Needs: A business line of credit can be a good way to grow and build a solid credit history for future financing needs as well, as many lenders require substantial financial records and credit history in order to approve you for loans and refinances. If you’re careful and responsible with it, the line of credit could actually help you increase your business credit score over time. And if you repay the amount you owe before the end of your draw period, you most likely won’t have to deal with any fees or penalties. 

Cons

• Costs: The biggest con of business lines of credit is that they can be quite expensive, with APRs as high as 10-20%, plus other fees. These can vary widely by lender, so it can pay off (literally) to thoroughly research your options before choosing one. If it’s an unsecured line of credit, it will likely have a variable interest rate, which means monthly payments can change unpredictably month to month.
• Challenging application process: The application process for a line of credit tends to be quite restrictive and demanding, with a typical credit score requirement of 600 at minimum — though it’s recommended that you shoot for an even higher score to increase your chances of approval. 
• Potential for quick debt accumulation: You have the potential to go into debt more quickly with a business line of credit than other funding sources, as the interest will compound onto the new principal amount if you miss even one monthly payment. The flexibility to take out as much cash as you want can also lead to trouble when you don’t keep an eye on your spending. In extreme cases, if you’ve ended up using the entire amount you qualified for and run into an unexpectedly slow period of low cash flow, you might find yourself unable to pay back the money — so it’s critical to first consider why you’re seeking funding and whether a one-time lump sum payment would be a better match. 

With an unsecured line of credit, it’s also recommended that you pay down your balance to zero several times during your term, which can be a hassle for some businesses. Business lines of credit are often a good choice if you are seeking a short-term financing solution — for example, you need to pay for a new piece of equipment, buying extra inventory in anticipation of a busy sales period, or hiring additional employees as you scale rapidly. Given the high fees and risks of debt that come along with business credit lines, it may not necessarily be a great fit if you are looking for a long-term and consistent funding source, simply because of the variable interest rates and potential for missed payments to add up quickly. 

Who Offers Business Lines of Credit?

You can find business lines of credit through most traditional financing providers, like banks and credit unions. However, they can have very specific minimum requirements and rigid qualification criteria, so it may be worth exploring offerings from alternative online lenders, whose processes may be faster and less restrictive. While it depends on the specific provider, banks generally want to see at least three years of revenue and strong financial records in order to qualify applicants. On the other hand, while online lenders may be more lenient, their fees can be much higher than those of traditional financial institutions and the repayment periods tend to be shorter, from 6 to 24 months.

If you don’t think a business line of credit makes sense for your funding needs, there are other financing avenues to consider as well, many of which involve using your home equity toward your business. While it does add some level of personal liability, it can often be easier to qualify for a personal line of credit, especially if your company is fairly new and doesn’t have a substantial track record in terms of statements and credit history that most lenders require.

Home equity loan

With a home equity loan, you’re using your home as collateral and borrowing against the equity you’ve built up in your home. There’s a flexible repayment period that ranges from 5 to 30 years, and unlike a line of credit, it doesn’t matter whether or not you pay the balance down to zero every year. But while these loans have fixed interest rates and predictable, consistent monthly payments (a plus for business owners), you are taking on a second mortgage with this option, meaning you’ll have another monthly payment to worry about. The application and approval process can prove difficult depending on lenders’ specific requirements, too.

Home equity line of credit (HELOC)

Similar to a business line of credit but using your home equity as a source of cash, a HELOC can also give you on-demand access to cash. The application and approval processes are often less restrictive than those of a loan, but like a loan, the interest that you pay on the money may be tax deductible. Repayment terms are fairly long, ranging from 15 to 20 years.

But also just like a business line of credit, home equity lines of credit have variable interest rates which means that your payments may fluctuate drastically every month. Your lender also has the ability to freeze your HELOC at any time if your credit score or home value drops too low.

Cash-out refinance

A cash-out refinance — which replaces your original mortgage with one that has a larger balance than what you owe and gives you the difference in cash — can provide you with funding for your business, and it can also help you to lock in a lower interest rate on your mortgage. However, because you’re basically paying off your previous mortgage with your current one, your timeline will be lengthened and you’ll have to pay application, closing, origination, and possibly even appraisal fees.

Home equity investment

A home equity investment gives you cash in exchange for a share of your home’s future value. There’s no interest or monthly payments to worry about, and like a line of credit, you’re free to use the money as you wish for anything your business needs: equipment and supplies, marketing, hiring, or office space. Plus, this option lets you maintain critical cash flow to keep your company running smoothly. You have 10 years to settle the Investment through a refinance, buyout with savings, home sale, or loan, and there aren’t any fees or penalties for settling the Investment early.

If you’re looking for a funding option for your business that doesn’t come along with the stress of interest or monthly payments, a Hometap Investment might make sense. Take our five-minute quiz to see if a Hometap Investment could be a fit for your business financing needs.

Is Hometap right for me?

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.