Financing Your Next Business Venture

More and more individuals are looking to make the jump from corporate America to entrepreneurship. Often, financing a business purchase is a topic that people do not address early enough in the process. Although there are many great business opportunities available, how you finance your business venture often determines the level of success you will 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 – don’t tell your banker you need the HELOC to buy a franchise. This could potentially delay the process for you as it can raise many more questions.

Bank Loan – Tell a bank that you want a loan to start a new business. Odds are you won't get any money unless you can prove you don’t need the loan. That 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 2 or more years. An SBA loan will likely be more expensive (and time consuming) to obtain than other methods (45-120 days). SBA loans carry an additional origination fee (on top of the one paid to the actual loan broker) to cover the guarantee that the SBA provides.

Retirement Funds – 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, another way to use your retirement funds to finance a business. This funding solution can be performed by a handful of experienced and qualified professional organizations across the country and is a combination of a 401(k) and a corporation. In using this structure, your retirement account invests directly into your new business, providing the necessary capital to purchase, open and operate. Your retirement account actually takes ownership by purchasing stock in the corporation – and is much like if your IRA were to purchase shares in a publicly traded company. The benefits; it does not add to overhead, saves on distribution taxes and penalties and as your franchise becomes profitable, your retirement account will also realize gains…tax-deferred.

Determining how you will finance a new business purchase is one of the most critical choices you will have as an entrepreneur. The first thing you should do—once you're fairly certain you've found the business that is right for you—is to request information and start looking into your options.