The Other Colors of Money

If banks and VCs are out of your financial picture, don't despair. These 3 alternative sources of capital could provide the funding you're looking for.

Even with all the venture capital choices we've presented in "Seeing Green," you may need some alternatives to banks and VCs. Alternative financing sources abound-if you look in the right places.

Start close to home, and consider these three options: hidden personal wealth, angel investors and commercial finance companies.

Hidden Gold

It may sound clich├ęd, but no one believes in your dreams quite as much as you do. So it's natural that you should try to bankroll yourself. Doing so will impress partners, investors and customers. After all, nothing says "I'm serious" like investing your life savings in your business.

Before you apply for a second mortgage or a wallet full of new credit cards, however, you might want to dig a little deeper for your own "hidden" wealth. You may be surprised to find more capital than you imagined.

These hidden sources of personal wealth can include nearly any current financial asset. Life insurance policies, 401(k) plans, IRAs and stock portfolios are among the most commonly overlooked sources of business capital.

"Borrowing against life insurance can actually be very beneficial," says Russ Grzywinski, a registered investment advisor and president of Oak Brook Financial Group in Charlotte, North Carolina. "You can take a loan against the cash value of a policy, then pay it back at a flexible rate that suits your business cash flow."

You may think his approach is counter-intuitive, but Grzywinski suggests borrowing from yourself at a high interest rate: "When you borrow against a life insurance policy, the interest is a deductible expense for the business [as well as] tax-deferred income for the individual. It's a very powerful concept." Not only are you repaying your loan, but you are also effectively creating a higher cash balance for the next time you need it. Says Grzywinski, "You're taking the finance company out of the loop and becoming your own bank."

With a whole life policy, Grzywinski adds, you may have the option of not paying back the loan at all. Any shortage will simply be deducted from the death benefit when you die. If you can't take it with you, use it to grow your business.

Your retirement savings is the next logical place to look for hidden personal wealth. That 401(k) from your previous employer may be the best place to start. Grzywinski advises entrepreneurs to keep retirement savings in a 401(k) account, since it's easier to borrow against than, say, an IRA.

IRA accounts, including SEP and SIMPLE retirement plans, typically have stricter limitations on borrowing or investing. Generally, you can invest your IRA money in a private company (with some restrictions), but there are only a handful of custodians that would allow that to be done, says Grzywinski. "The problem is valuation," he explains. "The account custodian can't get a handle on what that investment is worth each year."

Finally, Grzywinski says, don't forget your public stock investments. But before you ask your broker for a traditional margin account, check with your local banks. "The interest rates are probably better at a lender than in a margin loan at your brokerage firm. Plus, a local bank may be more sensitive to an entrepreneur's needs," he says. Check around for the best rates.

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This article was originally published in the July 2004 print edition of Entrepreneur with the headline: The Other Colors of Money.

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