by David Nilssen, CEO & Co-founder, Guidant Financial
Seasoned business owners may not have too much trouble getting additional capital, but when you’re just starting out, it may be tough. Quite frankly, in our volatile economy, traditional funding isn’t always a realistic option.
That means it’s time to get creative.
What most new entrepreneurs may not know is that there are alternative financing options out there. Here are three of the most popular:
1) Rollovers as Business Startups These are also known as ROBS (for Rollover as Business Start-ups) & 401(k) rollovers. This method lets you to invest up to 100% of your existing retirement assets into a business or franchise, without taking a taxable distribution or getting a loan.
Things to keep in mind: To function correctly, the arrangement must be set up to exacting standards. Unless you’re extremely well-versed in tax laws, you won’t want to attempt this without the help of a qualified professional to form and provide ongoing recordkeeping administration for the plan. Put simply: choose a firm that specializes in these types of transactions.
2) Unsecured Credit The traditional way—a secured line of credit—is to use your home or other property as collateral, but unsecured lines of credit don’t hold the same risk. This method of funding is called “unsecured” only because the lender doesn’t require you to pledge personal assets as collateral.
Things to keep in mind: Perform due diligence to find the best program but do not apply until you’re certain of the direction you want to proceed. If you have any negative reports (such as delinquent payments) on your credit, make sure to seek credit repair before applying for unsecured credit.
3) Portfolio Loans Some entrepreneurs may choose to fund their new business by selling securities they personally own and re-deploying them into their business. But there is an option to use a portion of a portfolio to invest in a small business or franchise but not sell the underlying securities. These loans can offer fair interest rates, longer amortization timeframe and generally close in a few weeks.
Things to keep in mind: Beware of unlicensed and unregulated lenders. The Financial Industry Regulatory Authority strongly recommends using their FINRA BrokerCheck tool to verify the licensing status and background of promoters, lenders and anyone else involved in the transaction. If the value of the portfolio declines and the borrower has drawn down the entire line, they may have to bring in additional funding independently, or sell securities, to maintain the appropriate loan to value.
If your liquid funds aren’t there, but you’ve got the ambition and drive to buy your slice of the American Dream, one of these alternative financing methods may be the right choice for you. Just remember to diligently explore all of your options before making a final decision.
David Nilssen has been a featured speaker at over 350 national and international events, covering topics from entrepreneurship to small business financing. In 2007, the Small Business Administration (SBA) named him the National Young Entrepreneur of the Year. In 2011, he co-authored a book called Making the Jump into Small Business Ownership and was honored as one of the Top 100 Small Business Influencers. David is a past president of the Seattle Entrepreneur Organization and a former board advisor for Youth Ventures.