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Six Ways Under Your Nose
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Title: Six Ways Under Your Nose To Finance A Home-Based Business
Author: George A. Parker
Article: There are lots of ways to get additional capital to expand ahome-based business.
But before you look outside for financing,leaving the decision about your company's progress and merits tosomeone else, consider these six ways under your nose to financea 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 eatsinto your safety reserve and is no longer there for emergencies.It diverts funds from a very low risk investment to a high one.
Six Ways Under Your Nose To Finance A Home-Based Business
Whole-Life Insurance
Whole life policies accumulate tax-deferred cash value that youcan tap for your business. But the only way you can tap thiscash without paying taxes is to borrow against your policy. Aslong 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 intoa high one; if you decide to terminate your policy or if youdefault on repaying your loan, taxes will be due on all cashvalue accumulated under the policy; if you die before your loanis repaid, any distributions to your beneficiaries will bereduced by the amount of your outstanding loan.
Six Ways Under Your Nose To Finance A Home-Based Business
A Loan from Your 401-K Plan
You can borrow up to $ 50,000 of the money you have saved undermany 401-K plans. There are no credit checks. Interest isusually a percentage point or two above the prime rate and theinterest that you pay back to the plan will be tax-deferred tothe plan. Most loans are repayable out of salary deductions overfive years.
The negatives: you will have less money invested towardretirement; the dollars used to repay the loan will be after-taxdollars withheld from your paycheck; if you fail to repay theloan, the IRS considers your failure a premature distribution --you will be charged taxes on the borrowed amount plus you may beassessed a 10% early-withdrawal penalty.
Six Ways Under Your Nose To Finance A Home-Based Business
A Home-Equity Loan
These loans do require that you apply and be reasonably creditworthy. You generally can borrow up to 80% or 90% of the equityvalue of your home. Interest on these loans is generallytax-deductible.
The negatives: you will reduce the equity value of your home bythe loan amount; you will be diverting funds from a relativelysafe investment to a high risk one; if you default, you put yourhouse at risk of foreclosure. Think very carefully before usingthis form of financing.
Six Ways Under Your Nose To Finance A Home-Based Business
Personal Credit Lines and Credit Cards
They are convenient, versatile forms of financing. You canborrow 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 onmany of these arrangements will repay the outstanding balancewithin 42 months; it is easy to dig yourself deep into debtusing credit lines and credit card debt; high outstandingbalances against your line can negatively impact your personalcredit rating.
Six Ways Under Your Nose To Finance A Home-Based Business
A Margin Loan
You can use margin loans for purposes other than buyingadditional securities.
Any margin loan will be secured by your equity shares. Rates areoften below prime, applying is relatively easy, and these loanshave very flexible repayment terms.
Loans are initially limited to 50% of the purchase price of yourequity securities. Loan repayments are triggered when the valueof your stock falls below the margin limit.
The negatives: Because borrowings are predicated on volatilestock values, a margin loan can be a risky proposition; if youdefault in repaying, the brokerage firm can sell your securitiesto satisfy the loan; an untimely sell-off can have a devastatingeffect on your portfolio and negative tax consequences.
The only safe way to consider a margin loan to finance ahome-based business is to limit advances to a relative low ratioof your stock portfolio value - say, 25% or less.
Most of these financing methods are under your control and don'trequire business plans or company financials to qualify.Although each of these methods has risks and disadvantages, sodo most external methods of financing. Before proceeding withone of these financing methods, carefully consider the potentialbenefits, risks and consequences. Whatever you decide, it helpsto know the options right under your nose.
About the author:George Parker is a Director and Executive Vice President ofLeasing Technologies International, Inc. ("LTI"). Headquarteredin Wilton, CT, LTI is a leasing firm specializing nationally inequipment financing programs for emerging growth andlater-stage, venture capital backed companies. More informationabout LTI is available at: www.ltileasing.com.
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