5 Ways to Fund Your Dream Business

by Carl Weiss

You’ve taken the time to research the franchise scene and have chosen a business that suits your personality and abilities to a tee.  Now for the hard part…coming up with the financial wherewithal to get the business started.  If the dream of owning your own business has stalled at the five yard line, allow me to show you five ways to raise money that don’t involve begging friends and family for a handout.

 

1. The SBA

 

If you are serious about starting a business, the Small Business Administration is one of the first places you should consider.  Aside from offering a wealth of free information and counseling to budding entrepreneurs, the SBA also offers several lending programs that you may wish to consider. 

 

Basic 7(a) Loan Guaranty. 

 

This program serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. It is also the agency’s most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes. 

Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets.

 

504 Loan Program

 

This program provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization. Typically a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost, and a contribution of at least 10 percent equity from the borrower. 

 

To learn more, contact your local SBA office or go to www.sba.gov

 

1. Your IRA

 

While many people don’t realize it, there are also ways of leveraging your 401k, IRA, Keogh, SEP or other retirement plan to If you have an IRA, 401(k), Keogh, SEP or other retirement plan to either buy a business outright or to leverage a loan that will let you secure the enterprise of your dreams. Best of all, you can tap into those funds before retirement age without incurring additional taxes or early withdrawal penalties.

 

By using a structure similar to that of a “self-directed IRA,” your purchase of a business or franchise is considered by the IRS and Department of Labor (DOL) as an investment in your business made on behalf of your retirement account. That means that, because it’s an investment, the profits are realized tax-deferred in your retirement account – or you can reinvest them in your business.

 

Because this purchasing strategy requires careful structuring of various accounts and entities, it’s not for the do-it-yourselfer. Fortunately, even though the numbers are fairly limited, there are retirement-account experts out there that specialize in setting up these unique financing vehicles.  (To find out more about firms that specialize in this kind of vehicle, go to http://franchiseforum.wordpress.com/2008/08/27/use-your-ira-to-start-your-dream-business

 

1. Find a Partner

 

Another way to raise needed startup capital is to take on a partner.  Aside from sharing the financial risk of starting a new venture, a partner can also add sales, marketing and/or management diversity to the equation.  Finding the right partner for you, however, is not always a straightforward proposition.  While there are a number of ways to locate interested parties, including advertisements in local newspapers, trade journals and online portals, networking , as well as friends and family, selecting the right partner can make or break a business before it is ever started.

 

Having worked with several partners during the past ten years, I can tell you that more important than the monetary contribution to any venture, the most important factors to consider before accepting a partner are experience, personality and chain of command.  Just because a potential partner says he or she has the experience for which you are looking, don’t take their word for it.  Check out their credentials, including running a credit report and background check.  Ask for and call references.  Google their name and see what you can find out about them.  What you don’t know about a partner’s background can most definitely hurt your new enterprise.

 

Once you are satisfied with a potential partner’s qualifications, you still need to make sure there aren’t going to be any personality conflicts.  To do this, you should spend time both on the job and off with any candidate you are considering as a potential partner.  Meeting the prospect’s family is one way to find out whom you are dealing with.  Is the mate behind the project?  Is the prospect’s home-life stable? 

 

You also need to designate in writing the partner’s responsibilities as well as your own when it comes to helming the business.  If you are going to assume the mantle of managing partner, is the prospect willing to assume a subservient roll?  If you are both going to co-manage, have the lines of demarcation been specified.  The last thing you need in a new business is a turf war over who is in charge of what. 

If you and the prospective partner can lay down the ground rules in writing and live with them, a partnership can be just the ticket to getting the ball rolling.

 

1. Home Equity

 

If you own a home, you can always use your equity to fund all or part of a business venture.  However, as with any loan, you need to first research whether this is the right option for you. 

 

First of all you need to understand the difference between the two kinds of home equity financing:

a.       A home equity loan is a one-time lump sum payment that is paid off over a particular amount of time with a fixed rate.

b.      A home equity line of credit (HELOC), works more like a credit card in that it has a revolving balance and variable credit rate.

 

Secondly, you need to make sure that you get the best value for your money.  Negotiate for the best rate (preferably one that is fixed). Keep in mind that if you use your home’s equity for anything other than a real estate investment that the interest you pay may not be tax deductible.  Also don’t forget to factor the loan payments into your financial planning.

      

As long as your home has appreciated in value, there is a bank or mortgage broker     that will want to lend you money.  The secret is to make sure that you have considered all the variables.  As with any financial undertaking, it is always a good idea to consult your accountant before making a final decision.

 

1. Credit Cards

 

While many people tend to shy away from using their credit cards to finance all or part of a business venture, this is still a viable avenue to consider.  In fact for many businesspeople, myself included, credit cards can be a terrific business tool, provided that they are used with respect.  By this, I mean that you need to have good credit, as well as a well-defined plan to payback the principle as well as the interest that this type of financing entails.

 

What I mean by this is that unless you can arrange in writing a fixed interest rate, you need to treat this type of financing with caution.  Don’t bee fooled by low or no interest rates that can jump to twenty percent or more in six months, unless you are positive that you can pay back the entire amount within this time period.  Also make sure to read the fine print with regard to any front fees that kick in if you take a cash advance.  (If you have more than one credit card and good credit, many times you can negotiate a better deal if you get on the phone and talk to your credit card company.)

 

Used judiciously, credit cards can be good for short term loans and equipment purchases.  Used inappropriately and then can spell disaster.

For more information regarding starting, funding, managing and growing a business goto:  http://franchiseforum.wordpress.com