If you have decided to take the plunge into the world of small business, you are likely evaluating finance options. Most businesses require some initial influx to cover startup costs. Before you embark on the exciting journey of owning a small business, however, it is important that you evaluate the financing options available to you.
Before you liquidate any assets or borrow money, do your homework. Many sources are available to help you learn about small business ownership, most for free. If you haven’t already done so, take advantage of sources like the following:
- The Small Business Administration (SBA);
- Your state’s small business support agency; and
- Your local chapter of SCORE, which provides free small business advice and pairs small business owners with mentors.
Talk to current and former business owners about their financing experiences. There is much to learn from the experiences of others. Even unsuccessful business owners have a lot to offer in the ways, whys, and hows of things that failed.
The SBA is a strong source of planning and financial information, as well. The SBA can help you make a solid business plan and provide a loan that is partially backed by the government. SBA loans usually run 10 years or less, and lenders usually require you to put down 20-30 percent cash to back the loan, as well.
Another popular source of start-up funds is assets you already own that you can liquidate quickly. These include stocks, bonds, and mutual funds. It is important, though, to consult with an experienced attorney or tax professional before liquidating assets because doing so often results in income, which means income tax liability.
Many people are discovering the advantage of leveraging their retirement accounts to fund their businesses. If you use a “rollover as business startup” (ROBS), you can access your retirement account before retirement age with no tax consequence. In addition, capital gains are sheltered in your retirement account, if you later decide to sell.
If you are blessed with a solid credit rating, traditional banks and credit unions offer loans to small businesses, again with a typical 20-30 percent cash contribution from you. To apply, you must provide significant documentation for review, including prior tax returns and a personal financial statement.
Less frequently used options include business credit cards, which can help to supplement operating expenses, particularly for new businesses, home equity lines of credit, and signature loans. We have a relationship with a company that can help you get up to $150,000 of 0% interest business credit cards that use your good credit score, but won’t impact your credit score negatively, even if you use all of the available credit.
In contrast, if you use personal credit cards and use more than ⅓ of the available credit, your credit score will go down, making it harder for you to get more credit in the future.
An experienced (and creative) business lawyer can help you sort out the options that best fit you and your new business.
This article is a service of Gratia P. Schoemakers, Creative Business Lawyer® One of our primary services is a LIFT Start-Up Session,™ in which we guide you through the right choice of business entity, location of business entity, start up agreements, intellectual property protection, employment structuring, insurance, financial and tax systems you need to start your next business and succeed right out of the gate. Call us today to schedule a time to get started!