Alternative Lending Options For EntrepreneursCynthia Umphrey
May 21, 2008 — 1,283 views
It is common knowledge that tight credit markets are causing traditional lenders to deny or restrict loans that they would have done in the past. While this may be a short term problem, if you are a business in need of a loan, a wait of 6 months to a year can put you right out of business or cause you to lose a business opportunity. This means start ups and existing businesses need to know what resources and alternatives are available to them and how best to get creative in using them.
The first place many who are denied a bank loan should go is to what is commonly known as the secondary market. One alternative in this arena is factoring. This is generally used by existing businesses who have a stream of income but may have cash flow dips and peaks. Factoring is usually available for companies who gross between $50,000 and $2,000,000.
Factoring is based on the revenue earned by businesses from their customers. In its simplest sense, factoring is buying your business’ receivables at a discount so your business can have the money now, instead of waiting until your costumers pay you. (It is similar to a loan in advance of an income tax refund). You can expect the interest rate to be high.
Many builders are also caught in the squeeze. You may seek out hedge funds specializing in buying up underperforming projects if your ability to lend against collateral has been maxed out due to the drop in real estate values, sales and related problems.
For start ups, the opportunities are still out there, but will rely heavily on personal credit and income stream. If it is possible for one of the business owners to keep his or her outside job while the business is in its start up phase, obtaining a loan will be much more likely than if you intend to rely solely on the unproven business’ income stream. Start ups can also look at other resources. One alternative option is to borrow money from a 401(k) plan. The federally set interest rates generally are lower than rates of most other lending options, and the individual pays himself back the interest over a long-term period. But a specific loan eligibility requirement exists: the 401(k) must be in an employer’s account whether the employee works there or not.
Another creative way to access your retirement money without paying interest and penalties in taxes to the government is by having your 401(k) actually own the start up itself. There are strict requirements about how this is done and a C corporation will be necessary, but when done properly it can allow you access to your entire 401(k) or IRA balances to fund your business.
Of course if your business goes south, you risk losing all or part of your retirement plan. So you must be sure this is within your comfort zone and is a prudent move before proceeding to use 401(k) or IRA money.
Other options include angel investors, friends and family, margin loans, sales of life insurance policies and the like. The key to finding alternative financing is to work with an experienced professional, be creative, and know your risk tolerances. It is also critical to develop a business plan that sets forth financial projections, business goals, market data, management information and the like. If you do not have a clear, professional and very well organized business plan, your chances of obtaining financing are cut by at least 50% if not much more.
For further information regarding these matters, please contact Ms. Umphrey at 248.619.2591 or [email protected]
Kemp Klein Law Firm
Cynthia Umphrey helps families and business owners make significant personal and professional life decisions. Ms. Umphrey calls upon over 10 years of experience in estate planning, probate administration, business structuring and business exit planning to guide you though life's most important choices.