Six Ways Under Your Nose To Finance Your Home-Based Business
by George
A. Parker
There are lots of ways to get additional capital to expand a home-based business.
But before you look outside for financing, leaving the decision about your
company’s progress and merits to someone else, consider these six ways
under your nose to finance your home-based business:
Personal Savings
Savings are easy to tap and involve no paperwork.
The negatives: if you use the money in your business, it eats into your safety
reserve and is no longer there for emergencies. It diverts funds from a very
low risk investment to a high one.
Whole-Life Insurance
Whole life policies accumulate tax-deferred cash value that you can tap for
your business. But the only way you can tap this cash without paying taxes
is to borrow against your policy. As long as you keep your policy intact and
pay premiums when due, loans remain tax-free.
The negatives: you will be converting a low risk investment into a high one;
if you decide to terminate your policy or if you default on repaying your loan,
taxes will be due on all cash value accumulated under the policy; if you die
before your loan is repaid, any distributions to your beneficiaries will be
reduced by the amount of your outstanding loan.
A Loan from Your 401-K Plan
You can borrow up to $ 50,000 of the money you have saved under many 401-K
plans. There are no credit checks. Interest is usually a percentage point or
two above the prime rate and the interest that you pay back to the plan will
be tax-deferred to the plan. Most loans are repayable out of salary deductions
over five years.
The negatives: you will have less money invested toward retirement; the dollars
used to repay the loan will be after-tax dollars withheld from your paycheck;
if you fail to repay the loan, the IRS considers your failure a premature distribution
-- you will be charged taxes on the borrowed amount plus you may be assessed
a 10% early-withdrawal penalty.
A Home-Equity Loan
These loans do require that you apply and be reasonably credit worthy. You
generally can borrow up to 80% or 90% of the equity value of your home. Interest
on these loans is generally tax-deductible.
The negatives: you will reduce the equity value of your home by the loan amount;
you will be diverting funds from a relatively safe investment to a high risk
one; if you default, you put your house at risk of foreclosure. Think very
carefully before using this form of financing.
Personal Credit Lines and Credit Cards
They are convenient, versatile forms of financing. You can borrow and re-borrow
up to the line limit as needed.
The negatives: you will pay relatively high interest rates-- rates range from
12% to over 18%; the minimum monthly payment on many of these arrangements
will repay the outstanding balance within 42 months; it is easy to dig yourself
deep into debt using credit lines and credit card debt; high outstanding balances
against your line can negatively impact your personal credit rating.
A Margin Loan
You can use margin loans for purposes other than buying additional securities.
Any margin loan will be secured by your equity shares. Rates are often below
prime, applying is relatively easy, and these loans have very flexible repayment
terms.
Loans are initially limited to 50% of the purchase price of your equity securities.
Loan repayments are triggered when the value of your stock falls below the
margin limit.
The negatives: Because borrowings are predicated on volatile stock values,
a margin loan can be a risky proposition; if you default in repaying, the brokerage
firm can sell your securities to satisfy the loan; an untimely sell-off can
have a devastating effect on your portfolio and negative tax consequences.
The only safe way to consider a margin loan to finance your home-based business
is to limit advances to a relative low ratio of your stock portfolio value – say,
25% or less.
Most of these financing methods are under your control and don’t require
business plans or company financials to qualify. Although each of these methods
has risks and disadvantages, so do most external methods of financing. Before
proceeding with one of these financing methods, carefully consider the potential
benefits, risks and consequences. Whatever you decide, it helps to know the
options right under your nose.
About the Author
George Parker is a Director and Executive Vice President of
Leasing Technologies International, Inc. (“LTI”). Headquartered
in Wilton, CT, LTI is a leasing firm specializing nationally in equipment financing
programs for emerging growth and later-stage, venture capital backed companies.
More information about LTI is available at: www.ltileasing.com.
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