Follow up to Part 4; we’re discussing How To Get A Small Business Loan or Unsecured Lines of Credit That Will Start, Build, and Grow Your Business. We are continuing to talk about financing a small business with debt.
Cashing Out or Borrowing from Retirement Funds
These are also known as Rollovers as Business Startups or ROBs. ROBs work like this: You incorporate your business and create a 401(k) plan for the startup. Then you transfer funds from an existing retirement account to this new retirement plan. Then, you borrow out the money from your company plan to spend on business growth – tax free.
ROBs are a great option for the right people. They are also extremely popular in the franchising space. So, while they are a great option for some people, you must know that this is perhaps the riskiest of all business financing strategies.
– According to Michael Gerber, the author of The E-Myth, 40% of businesses fail in the first year. Additionally, 80% of businesses fail within 5 years.
When you use your retirement funds to build your business you’re obviously risking your nest egg that you worked hard to build up over many years.
If the money you need is for the purchase of a piece of business equipment such as company trucks, there are specialized equipment lenders that can help. Rates for an equipment loan can range from bank-rate to high cost, depending on the individual applicant’s credit and the type of equipment.
Not all banks do equipment lending, and the ones that do will often require a down payment — and won’t offer a leasing option. For these reasons and many others, small business owners normally prefer non-bank equipment financing. Most banks don’t want to end up repossessing a construction crane and having to market and sell it – that’s not their business.
I often recommend small business owners consider leasing equipment rather than taking on long-term debt with a loan for an asset that may not have much resale value down the line. Leasing preserves your cash flow, as it doesn’t require a down payment and usually little or no money “out of pocket.”
Merchant Cash Advance (also known as Merchant Financing or an MCA)
The Merchant Cash Advance (MCA) industry has become more popular in recent years after the crash of 2008 due to restriction of capital that banks are imposing on small businesses today. The MCA industry has only been around since the late 1990’s yet it is a multi-billion dollar industry today when you include all the bank statement lenders who are a type of hybrid MCA lender.
This product primarily serves the use for short term financing. Essentially an MCA is a lump sum advance of cash against future income of a business. There is no fixed payment or time frame of repayment as you would find with a term loan. Typically advances are based on a business’s future credit card sales that will pay back the advance on a daily basis.
– This product primarily serves the use for short term financing. Essentially an MCA is a lump sum advance of cash against future income of a business.
Factoring, sometimes known as Accounts Receivablesfinancing, actually has been around for thousands ofyears dating back to Biblical times. It is one of oldestforms of financing on record. In today’s world, it is simplya way for businesses to turn their accounts receivablesinto cash.
– Factoring is designed for businesses that sell a product or provide a service to other businesses.
It is one of the most effective ways to facilitate growth for a company whether the company is a start-up or established business and is even more popular in times when banks tighten up and restrict lending. It is important to note that factoring is not a loan but actually the selling of an account receivable at a discount.
Here’s how factoring works: A factoring firm purchases its client’s accounts receivable invoices at a discount in exchange for immediate cash, and title to the accounts passes to the factoring company upon transfer of the cash. An average transaction can be completed by a Factor within a week of receiving its client’s financial information. Invoices are funded on the same day that invoices are received from ongoing clients.
Purchase Order Finance
– you have a firm purchase order from a major customer, usually a big retailer or government agency. So instead of selling an asset of your company, you are actually getting an upfront advance prior to any product or service being delivered.
The risk for lenders here is even higher than for factoring, since they are funding materials that are not ready for sale and have not been delivered to the end client – so interest rates are higher, too.
Getting a P.O. loan is basically a desperation move used to preserve or establish an important client relationship or to get in the door with a large retailer. But if you don’t have the money you need to fill a big order, P.O. lending can really be a lifesaver.
For the capital you need to expand your business into foreign markets, there are specialized import/export loans. Most of these are backed by the Export-ImportBank of the United States.
– Think of this as P.O. financing but across borders.
Import/Export financing through nonbank lenders is essentially a P.O. loan that involves a product that crosses into another country.
This concludes the series on How To Get A Small Business Loan or Unsecured Lines of Credit That Will Start, Build and Grow Your Business. If you would like to read the 16 Best & Most Common Business Financing Options for your Small Business click here.