More and more individuals are looking to make the jump from employee to employer through business ownership. Determining how you will finance a new business purchase is one of the most critical choices you will have as an entrepreneur – one that is oftentimes not explored early enough in the process. Researching your financing options should be one of the first steps in the process after you have decided business ownership is right for you.
Although there are many great business opportunities available, how you finance your venture often determines the level of success you will ultimately enjoy. Traditionally, there have been four ways that people finance a business:
Home Equity Line of Credit (HELOC)
The real estate market has enjoyed a nice run in the past decade, and many people, perhaps you, have home equity you could use to purchase a franchise. A benefit of using a HELOC is that it is relatively cheap money and can be closed fairly quickly. If you choose this route – be prepared for a delay in the process when you explain to your lender you want this money for investments, as this will likely raise many more questions.
It seems that if you tell a bank you want a loan to start a new business, you won’t get any money unless you can prove you already have so many assets you don’t actually need the loan! A bank loan means collateralizing the business with other assets such as cash, stocks and home equity. In addition, most banks will require a significant down payment.
SBA (Small Business Administration) Loans
The SBA doesn’t lend money. The SBA guarantees loans and is primarily for those people who still could not borrow money even if they have the necessary collateral. The SBA provides this guarantee to the banks so they will provide loans with less stringent qualifications. SBA loans work best with franchise opportunities or businesses that have been in existence for two or more years. An SBA loan will likely be more expensive (and time consuming) to obtain than other methods (45-120 days).
Many entrepreneurs will take a taxable distribution from their retirement plan in order to come up with the necessary capital to purchase a business. There is, however, a much better way to use your retirement funds top help purchase your business. This funding solution is a combination of a 401(k) and a corporation. In this structure, your retirement account invests directly into your new business via a corporation, thus providing the necessary capital to purchase, open and operate. Your retirement account actually takes ownership by purchasing stock in the corporation – similar to your IRA purchasing shares in a publicly traded company. The benefits? You have 401(k) plan for your new business. As the company prospers, the value of the retirement plans investment increases – tax deferred. And, there is no loan and thus no payments..
An increasing number of investors are discovering the many benefits to utilizing their retirement funds to invest in a business or franchise helping to secure a healthy financial future. You may find that you, too, are virtually sitting on undiscovered capital!
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