Personal Assets: The answer may be right under your nose On a short-term basis, many entrepreneurs fail to look at their existing assets as sources of funding. Many don’t realize that they can borrow against an Individual Retirement Account (IRA) with no penalty, as long as the funds are replaced within 60 days. However, if the business owner cannot repay the loan within the 60day timeframe, serious tax penalties can result, so this option should only be accessed if there is a certainty of imminent repayment, and it is a good idea to consult a tax advisor. Another hidden source of funding could be a whole life insurance policy. Loans can be taken from the cash build-up in whole life insurance policies,* and many successful business owners have taken advantage of policy loan features for decades. For instance, the owner of JC Penney borrowed money from his whole life policy after the stock market crash to keep his business going. Walt Disney borrowed against his life insurance, too, as he built and expanded Disney World.
Friends and Family: Familiarity and pride come with high-expectations and options If family and friends have the means, they could be in a position to help an entrepreneur start up a business, but if providing start-up funds can cause a hardship to the family, this source should be avoided. Family members know each other’s strengths and believe in each other, but that familiarity and pride may come with very high expectations and correspondingly high degrees of headaches and stress.
Credit Cards: Fast, but expensive
additional funds. “Banks want to see equity in the business, not high-interest personal debt,” Arriola says.
Vendors: An overlooked source may lead to giving away a piece of the business With a sound business plan and initial success, entrepreneurs may be able to approach a well-known vendor and arrange for upfront capital in exchange for a commitment to sell a set number of units of the vendor’s product. In some cases, a vendor may ask for more than a commitment to sell a predetermined amount of product, specifically equity in the business. Start-ups that are looking for new sales channels or advertising partners may want to take a closer look at this source of financing, but entrepreneurs who do not want to take on an equity partner should proceed carefully.
Small Business Administration (SBA): Small business friendly but tougher than banks to qualify Many start-ups first turn to the SBA for funds, but the application process can be difficult and work-intensive. “The SBA looks for a lot of the same things that banks do,” says Arriola, “including sources of equity, payment plans, and the purpose of the loan, things that are difficult for start-ups to substantiate. SBA loans are easier to qualify for after a new business has proven itself and built equity, cash and profits,” he concludes.
Angel Investors: Seek and thee may find A great deal has been written lately about Angel Investors, but “they are very difficult to find,” says Arriola. In order for an angel to invest, the business has to be in an industry that is familiar to the investor, and the business itself has to be relevant to that industry. Also, the owner has to be able to show proven success and strong business management skills before an angel is comfortable assessing the risk and taking the plunge, he explains. As the economy continues to gain momentum, entrepreneurs can take heart in knowing that they may still be able to find access to funding as they pursue their American dreams. dD
Getting funds from existing or new credit cards is quick and easy. Entre*Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value preneurs can apply online for as many cards as they can, and have an answer and death benefit, increase the chance the policy will lapse and may result in a liability, if the policy right away, but they don’t come without their own set of issues. Credit card debt terminates before the death of the insured. is generally unsecured, which means that it’s not encumbering other assets, such as a home. The issue with using credit cards, though, is that it can become very expensive. Even with Chris Michael Mendoza is assistant vice president of multicultural market development for MassMutual in Springfield, low-interest cards, if one payment is missed, Mass. Mendoza has 20 years in the insurance and financial services industry. the interest can jump from a low seven Luis Hernandez is a registered representative and an investment advisor representative of MML Investors Services percent to 18, 22, even as high as 27 percent, LLC, member SIPC, Supervisory Office: 2100 Ponce De Leon Blvd, 6th Floor, Coral Gables, FL 33134, 305.648.2445. plus late fees. To make matters worse, if a business owner has a high credit-card debt ratio, it would make it challenging to secure
fall 2012 | www.DECISIVELATINO.com
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