You Have the Dream; Now Let’s Get The Funding!
In Funding Ideas for Entrepreneurs – Part 1, we talked about Crowdfunding and using your 401(k) account. In Part 2, we’ll discuss two more options to consider when looking to fund your business. (Note: These funding options are in no particular order.) Plus, there are other factors to keep in mind when looking for funding:
- what stage is your business in – start-up, short-term or expanding?
- what kind of collateral do you have?
- how much will it cost you to obtain this money?
Option 3 is a Home Equity Loan or a Cash Out Re-fi. A home equity loan is a type of loan in which you use the equity in your home as collateral. These loans are useful to finance major expenses such as home repairs, medical bills or college education. A home equity loan creates a lien against your house, and reduces actual home equity. Upfront fees are not insignificant, but there are no ongoing fees. Interest rates are dependent on your FICO score (you need a credit score of 700) and how much you want to borrow. (If your score is not there yet, start working on it. You’ll be glad you did!)
A Cash Out Re-fi is a new loan that allows you to take out your equity to pay bills or to fund your business, but at a better interest rate than you would get with a home equity loan. The Home Equity Loan is also called a Home Equity Line of Credit (HELOC).
Costs – Generally, you can expect to pay 3% of the loan amount in out of pocket expenses. If you do a cash out FHA or VA loan, you will also have upfront mortgage insurance costs to deal with. Those upfront costs are about 1.75% for the FHA loan and 2.15% of the VA loan. The upfront mortgage insurance can be rolled into the mortgage with the VA loan, but that means you have less money to invest in your business. A cash out re-fi will have a lower interest rate than a second mortgage. Also the amount you can borrow depends on the current value of the home. Typically you can only borrow up to 85% of value of your home, minus your existing first mortgage. So, if your home was worth $500,000 and you owe $300,000 then you would only be able to borrow about $125,000. This might be tough to do in the current economic market. The Upside is that this loan is easier to get if you have equity in your home, because they use that as your collateral. The Downside is that you are leveraging your home. Be careful; do your homework before considering this and other funding options. If your business fails to succeed, you still have that loan against the house and you have to pay it off or you could lose your home and ruin your credit.
Option 4 is the government option through the Small Business Administration (SBA). The SBA does not make loans directly to small businesses, but it does help to educate and prepare the business owner to apply for a loan through a financial institution or bank. They will show you how to create a business plan that the lender will want to see before making the loan. The advantage of working with a franchise broker is that we have the expertise in putting a business plan together so that you are more prepared when you contact the lender. The SBA then acts as a guarantor on the bank loan. For more information on training, grants, loans, and funding, you can visit www.SBA.gov. Interest rates are negotiated between the applicant and the lender. Here the Cost “depends” on how much of the upfront fee the lender passes on as well as if the lender charges upfront prepaid interest on the loan. . With this one you also need a credit score of 700. Upside is that the government backs the loan with a guarantee. If you are looking to borrow up to $150,000, then the SBA can guarantee as much as 85% on the loan. Downside is that you are personally responsible.
In Funding for Entrepreneurs – Part 3, we will discuss Seed Money, Cash, and Traditional Bank Loans. I hope that reviewing these funding options will show you that funding your dream is possible; you just have to take the first step. Call me and we can discuss your options. Remember, this is one step on the path to your dream.
If you don’t want to create a whole new business from scratch, then you might want to consider a franchise. I can help you find the right franchise business for you. You can contact me by email at firstname.lastname@example.org or by phone at (859) 866-3349. I can help you find the right funding option to help you become an Entrepreneur!