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If you are a successful business owner, then you probably will not have any trouble financing a new venture. Not only do you have cash, but banks are lining up to loan you money. However, you do not need it since you already got it. Not everyone is so lucky, but the good news is that there are plenty of small business financing options for those who need to secure financing to build or buy a business.
You might have already heard of the common ways people fund their business, but here we will discuss some of the other alternative ways you might not have heard about yet and it might be just the right one for you.
Portfolio loans
Many entrepreneurs fund a business by selling securities they own personally and then investing the cash they earn from the sale into their business. Many entrepreneurs might not realize that there is an option to use a portion of a portfolio to invest in a small business or franchise without selling the underlying securities.
You can leverage the value of your portfolio assets into a revolving line of credit with a loan-to-ratio value between 65 and 90 percent with a portfolio loan.
These loans offer decent interest rates and a longer amortization timeframe and move from application to approval in a matter of a couple weeks. Entrepreneurs can continue to reap the rewards of appreciation as their stocks increase in value in addition to the attractive terms.
Be sure to watch out for unlicensed and unregulated lenders. If the value of the portfolio declines and the borrower has drawn down the entire line, the borrower might have to get outside capital or sell securities in order to maintain an appropriate loan-to-ratio value.
Rollovers as business startups
Rollovers as business startups, also known as ROBS or 401(k) rollovers, are starting to become more popular. Some estimate that around 30 percent of new franchises each year are funded this way. ROBS allow you to invest up to 100 percent of your existing retirement assets into a business or franchise by migrating your retirement funds into a new account that operates as stakeholder of your business. Entrepreneurs avoid paying taxes and penalties for withdrawing funds from their retirement account early by migrating the funds together.
To avoid IRS penalties, the arrangement must be set up to exacting standards in order for rollovers as business startups to work effectively. You should seek help of an expert to form and provide ongoing administration for the plan. To put it simple, hire a firm that specializes in this type of transactions.
Unsecured credit
You can fund a new business through an unsecured line of credit. If your personal credit is strong, this is a good option for you. You can get up to $125,000 in startup capital. This type of credit is called unsecured because there is no collateral involved or any requirement that you need to pledge your personal assets. Many small business owners prefer this during the start up phase of their business because a successful outcome is not certain.
For new businesses, you will need to include a business plan in your loan application and show up to three years of earnings projections. The lender will want you to be able to explain exactly what you will use the money for so that they feel confident that you can pay it back in the future.
There are many unsecured programs available with interest rates and origination fees that vary so be on the lookout for that.
The Bottom Line
Shop around for the best program but do not apply it until you are certain of the direction you want to proceed – if you have too many hard inquiries in your credit history in a short period of time it can damage your credit score and decrease the likelihood that you will be approved for a loan with terms that are favorable. Make sure that you resolve any negative reports like late payments on your credit history. One of the alternative options above might be the right choice for you, just remember to do your research for business opportunities and financing options before you commit.
