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 clichéd, 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.
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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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