Alternative Ways to Fund Your Business You Have Not Thought Of

You will have no trouble financing a new venture if you are already a successful business owner or have just received a generous inheritance. However, the rest of the entrepreneurs might not be in the same situation and need to secure financing to build or a buy a business. Traditional small business financing—such as the Small Business Administration (SBA) loan programs—can be very difficult to secure. However, there is still a chance for you to get funding for your business in some other ways you probably have not heard about yet. Here we will discuss the alternative ways you can get funding for your business.

Portfolio Loans

Many entrepreneurs fund a business by selling securities they personally own and then investing the cash they earn from the sale into their business. What those entrepreneurs may not realize is 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. A portfolio loan allows you to leverage the value of your portfolio assets into a revolving line of credit with a loan-to-ratio value (a lending risk assessment that lenders use) between 65 percent and 90 percent.

These loans offer fair interest rates and a longer amortization timeframe, and they move from application to approval in just a few weeks. Business owners can reap the rewards of appreciation as their stocks increase in value.

You need to avoid unlicensed and unregulated lenders. If the value of the portfolio declines and the borrower has drawn down the entire line, the borrower may have to bring outside capital, or sell securities, to maintain the appropriate loan-to-ratio value.

Pros and Cons of a Portfolio Loan

Pros

  • Looser qualifying standards
  • Closer relationship with your lender

Cons

  • The possibility of high interest rates rate or fees

Rollovers as business startups

Rollovers as business start-ups (ROBS) are also known as 401(k) rollovers, and they are becoming more and more popular. It is estimated that 30 percent of new franchises each year are funded through ROBS. ROBS allows you to invest up to 100 percent of your retirement assets into a business or franchise by migrating your retirement funds into a new account that then operates as a stakeholder in your business.

Migrating the funds this way allows entrepreneurs to avoid paying taxes and penalties for withdrawing funds from their retirement account early. ROBS began fairly recently which as designed to encourage investments in small businesses.

The arrangement needs to be set up to exacting standards in order for ROBS to work smoothly and avoid IRS penalties. Seek the help of a professional to initially form and provide ongoing administration for the plan.

Pros and Cons of ROBS

Pros

  • You will not take on debt
  • You will not pay penalties or taxes

Cons

  • Your retirement is at risk
  • You will lose out on retirement-savings gains
  • You must operate as a C corporation
  • You will pay costly fees
  • The risk of an IRS audit is greater

Unsecured Credit

An unsecured line of credit is another method of funding a new business. If your personal credit is strong, an unsecured line of credit can be a good way to get your hands up to $125,000 in startup capital. It is called “unsecured” because the lender does not require you to pledge personal assets as collateral. New business owners do not want to pledge their personal assets during the startup phase because it is uncertain if the outcome will be successful.

Your application will include a business plan and up to three years of earnings projections. Be prepared to explain exactly what your intended use of funds is so the lender will feel confident that you can pay it back.

Watch out for unsecured programs that have varying interest rates and origination fees. Shop around for the best program for your business but do not apply unless you care certain you want to proceed. If you have too many hard inquiries show up in your credit history in a short period of time, it can hurt your credit score and lower your chances of being approved for a loan with favorable terms.

Make sure that you resolve any negative reports on your credit history too before seeking an unsecured loan.

Pros and Cons of Unsecured Line of Credit

Pros

  • No risk to personal property
  • Simple application process

Cons

  • If you default, lender comes after you
  • Loan amounts may be small
  • Rates and payments are higher

The Bottom Line

If you are looking to finance your small business, there are several alternative options you can choose if you do not want to go the traditional route. After doing research and seeing the pros and cons of each, find out which one is right for you.