Funding… Don’t Fear – There are Options
Maybe the first and biggest step has been taken. “I’m ready to invest in a business”. Now one must consider the realistic options and possible obstacles.
Funding isn’t easy. The days of simply walking into a bank and getting a signature loan are a distant memory. Years ago, lenders simply looked at criteria such as having good credit, a job, and a home. Under those circumstances, bank approvals were relatively easy. Today however, it is no longer that simple.
There are many challenges today. The typical consumer isn’t aware of the intricacies involved with funding. Since 2008, the lending climate has gone through a multitude of changes. But, with patience and the assistance of consulting experts, funding is available.
Recommendation – do your research and review all the possibilities. New business owners are getting more creative and expanding the different combinations to find solutions.
Depending on the situation, there are two ways to approach funding. One is through DEBT funding and the other is with EQUITY funding.
When exploring debt/loan options, there are many choices:
• SBA/Conventional loans
• Personal/Business lines of credit
• Home Equity lines of credit
• Borrowing from friends/relatives
• Using Stocks as collateral for loans
When avoiding debt, and looking for Equity options:
• Leverage 401K/IRA funds (for any retirement tax deferred accounts)
To explore the various debt funding options, one can work with a local bank/credit union or work with a lending broker. Based on the choice or choices, it can take one to six months to complete funding, with SBA or Conventional loans taking the longest.
Small Business Administration (SBA) loans require a combination of many variables that are thoroughly reviewed by any local bank to help determine if this is a good fit. There are also SBA/lending brokers that specialize in this option and can help navigate this very detailed process.
Among the items that lenders generally look for, they request 20-30 percent cash down from the borrower. Lenders need to see that the borrower has a vested interest in the new business.
Commonly, lenders also like to see collateral. Additionally, a detailed business plan is needed, along with good credit, a proven ability to repay, business experience (in the same field you are investing in), and other variables that the lender will share.
Personal/business lines of credit are attractive for those who don’t have collateral or those not interested in using collateral. Obtaining unsecured lines of credit is often through a process in which one acquires credit cards either using personal credit or through business lines of credit.
This process includes a number of different lines of credit since lenders are rarely willing to offer large credit approvals without collateral. However, a combination of multiple lenders collectively may provide the funding needed. This allows the borrower the option of liquidating various lines, providing cash for the new business.
People know they need to be properly capitalized, or even better to be overcapitalized. From history, we know the number one reason that businesses fail early on, is due to a lack of sufficient funding. With credit scores of 700 or more, good credit payment history, and a reasonable debt load, this may be an option to consider. To successfully navigate this detailed process properly, be sure to work with a company that specializes in unsecured lines of credit.
A home equity line of credit (HELOC) is also a quick option, but keep in mind, you need to be employed, have good credit, and have enough equity in your home to be able to proceed with this option. Often times, when people realize that they may not qualify for loans/lines of credit, they may try to look for other investors.
This is typically a difficult task; however some people may ask family or friends for financial help. Should individuals venture down that path, they would want to have a clear and concise plan for the repayment. And, they may want to have a contingency plan available. For people with stocks/bonds outside of retirement funds, the option of a secured loan may be considered. Usually persons would want to have a portfolio of over $100,000 for this option. These are for funds outside of an IRA or 401K.
If the firm that holds those assets allows, individuals may be able to get a loan against a percentage of those assets. Interest rates can be attractive for loans like this, but rates vary based on market conditions.
To help determine funding options visit this Funding Calculator: http://tenetfinancialgroup.com/step-2.
If getting into business, with debt, isn’t attractive, the other option is to review using equity.
One common way to fund a business without debt is to access retirement funds. This option is called
a Rollover as a Business Start Up or a Self Directed 401K. This is possible for someone that has retirement funds that have not yet been taxed and that are not tied to a current employer. There are many types of accounts that can qualify.
For example: 401K, IRA, SEP IRA, 403b, 457, Thrift Saving Plans, and Annuities (if from retirement funds), are the most common. To learn more about that option, visit www.tenetfinancialgroup.com and view www.youtube.com/watch?v=1T-5pgf68dg.
Another equity funding option is simply using cash. Conventional wisdom says “cash is king”, so keep your cash for a rainy day. Many people who have cash may be reluctant to use it or may wish to use only a portion. Frequently, clients say, “I would rather use someone else’s money, and keep my cash.” A number of those clients weren’t initially aware that they can utilize 401K/IRA type funds.
Note: when working with a company that specializes in this option, one is able to access retirement funds both penalty free and tax deferred.
The option of using retirement funds provides the ability to access the funds both penalty free and tax deferred. That’s right. Regardless of age, regardless of the amount of funds needed; a person can access retirement funds (as long as they are not with a current employer).
How does that work? The rollover funding option, allows an entrepreneur to invest retirement funds into a new corporation. Those funds can be used to buy a new business or to recapitalize an existing business. This gives the investor the opportunity to use the funds for any business expense and to pay salary. The IRS has numerous rules and regulations, and when followed by a company that specializes in this option, you can use any amount of retirement funds, as long as it is a for profit company.
Tenet Financial Group, based outside of the Dallas/Ft Worth area, is rated A+ by the BBB and works with clients all across the United States. Founded in 2008, Tenet Financial Group has helped many people who want to be entrepreneurial and invest in themselves. Our clients can empower themselves and invest their retirement funds into their businesses. They appreciate the opportunity of funding a business debt free and equity rich. This process can be completed typically in just three to four weeks.
Whether an investor uses debt or equity, or a combination of the options noted above, doing research is critical. Take the time to understand options and what may be most beneficial.
Regardless of the options, it’s vital that you ensure sufficient capitalization.
Diane Rosenkrantz has been working in the pension industry/consulting/customer service area for the past 25 years. Currently assisting clients, brokers, and franchisors across the country find the best funding options for new or existing businesses. A specialty of Tenet Financial Group is working with clients that have retirement funds; and Diane helps educate them on the process of accessing those funds for businesses. Over the years, she has written numerous funding articles and frequently speaks on the Rollover (ROBS) funding option. Her experience at MassMutual Life Insurance in the Pension area provided an excellent foundation for her knowledge of 401K and Profit Sharing Plans.