HOW BUSINESSES CAN ACCESS NON-TRADITIONAL FINANCING SOURCES
Entrepreneurs can turn to a variety of sources to finance the establishment or expansion of their businesses. Common sources of business capital include personal savings, loans from friends and relatives. loans from financial institutions such as banks or credit unions, loans from commercial finance companies, assistance from venture capital firms or investment clubs, loans from Small Business Administration and other government agencies, and personal or, corporate credit cards.
But for some business people, these sources of financing are either unavailable, or available with restrictions or provisions that are either impossible for the company to meet or deemed excessive by the business owner. In such instances, the capital-hungry entrepreneur has the option of pursuing a number of nontraditional financing sources to secure the money that his or her company needs. Some of the more common nontraditional financing sources include selling assets, borrowing against cash value of a life insurance policy, and taking out a second mortgage on a home or other property.
Selling Assets
Some entrepreneurs choose to sell some of their personal or business assets in order to finance the opening or continued existence of their enterprise. Generally, business owners who have already established the viability of their firm and are looking to expand their operations do not have to take this sometimes dramatic course of action, since their record will often allow them to secure capital from another source, either private or public.
When selling personal or business assets, the business owner should take a rational approach. Some entrepreneurs, desperate to secure money, end up selling business assets that are important to basic business operations. In such instance, the entrepreneur may end up accelerating rather than halting the demise of his or her business. Only nonsensical equipment and inventory should be sold. Similarly, care should be taken in the selling of personal assets. Items like boats, antiques, etc., can fetch a decent price. But before embarking on this course of action, the entrepreneur should objectively study whether the resulting income will be sufficient, or whether the enterprise’s financial straits are an indication of fundamental flaws.
Borrowing Against The Cash Value Of Your Life Insurance
Entrepreneurs who have a whole life policy have the option of borrowing against the policy (this is not an option for holders of term insurance). This can be an effective means of securing capital provided that the owner has held the policy for several years, thus giving it some cash value. Insurers may let policy holders borrow as much as 90 percent of the value of the policy. As long as the policy holder continues to meet his or her premium payment obligations, the policy will remain intact. Interest rates on such loans are generally not outrageous, but if the policy holder dies during the period in which he or she has a loan on the policy, benefits are usually dramatically reduced.
Second Mortgage
Some entrepreneurs secure financing by taking out a second mortgage on their home. This risky alternative thus provides the homeowner with a couple of advantages: interest on the mortgage is tax deductible and is usually lower than what he or she would pay with a credit card or an unsecured loan. But if the business ultimately fails, this method of financing could result in the loss of your home. Second mortgages are best for people who want to borrow all the money they need at one time and secure fixed, equal payments.
Other Possible Sources Of Financing
Some entrepreneurs obtain financing for growth and expansion through franchising or licensing. Basically, they get money by selling the rights to a unique business or product to other companies. Other business owners are able to form alliances or partnerships with other firms that have a vested interest in their success, such as customers, suppliers, or distributors. These business owners may obtain funds from their partners through corporative work agreements, barter arrangements, or trade credit.
Experts recommend nontraditional financing to start a business or provide funds during period of rapid growth, but emphasizes that business owner should consider it a temporary arrangement. You should look for nontraditional financing, but look at it with an eye to when can I get out of this, not as permanent financing… When you get strong, the banks will be calling you.
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