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Options To Look At When Looking For Funding For Your New Business
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When an entrepreneur decides to begin the process of starting his/her own business, one of the first steps taken is to look for funding. Creating a new business can be a stressful ordeal; however, raising the necessary business capital is part of this crucial process and one that should be thought about thoroughly before deciding on an option. During the funding search, the entrepreneur will discover that some options are more secure than others. It is important to make sure that the chosen method of securing capital is the most beneficial.

Home equity loans
One way in which an entrepreneur can raise capital for their new business is through a home equity loan (HEL). Some conditions must be met in order to qualify for an HEL. For example, the borrower must have collateral in order to secure a loan, a solid credit and cash flow history, and positive financial projections for the new business, amongst other requirements.

In a home equity loan, the borrower uses the equity in their home in exchange for a secured loan plus interest. When a borrower fails to repay the loan amount with its accrued interest rates, the ownership of the property gets automatically transferred to the financial institution that provided the loan.

Qualified applicants can usually obtain the money immediately; however, home equity loans can be very risky, especially for new businesses. If a new business does not perform well, then the borrower will be at risk for losing both their business and home. In addition, lack of repayment will eventually lead to a poor credit rating, which is often difficult to repair, especially if a borrower defaults on his/her loan.

Insurance policy loans
Many people with life insurance policies have a cash value to their plan. Often times, entrepreneurs are tempted to borrow against their own life insurance plans because of the prospect of obtaining immediate cash for their new business at low interest rates. The rate of charged interest is highly dependent upon when the insurance policy was initially purchased. Usually older insurance policies have the benefit of offering low interest rates when borrowing against their plans.

To qualify, the owner of the policy must be the one to borrow against their policy. In addition, they can borrow no more than 90% of their insurance policy’s cash value. As enticing as this may sound, the prospective business owner should be very weary of these types of loans.

One downside of borrowing against one’s own life insurance policy is the reduced amount of benefits in the occurrence of an eventual death. Not only will this loan diminish the amount of the whole policy but loss of interest will occur as well. If premium payments are not made on time, a “lapse” of policy may result, and the borrower may lose his/her life insurance coverage. Lack of payments can also result in IRS problems.

Retirement plan loans
A business owner can also choose to borrow against their retirement plan(s) to benefit their startups. Retirement plans such as a 401k or an IRA may be the solution for many business owners since it is another way to obtain immediate cash. However, retirement plan loans carry plenty of risks, including the chance of the borrower defaulting on their loans. In addition, the defaulted loans and economic hardship withdrawals are both taxed as income and pose a 10% penalty if the borrower is less than 59 ½ years old. Obviously, the danger involved with this practice can be drastic, so the entrepreneur needs to make sure that their new business will be a potentially successful idea in order to prevent the repercussions of non-repayment.

Conclusion
Looking for funding to raise capital for a new business can be very stressful. It is not only important to explore all options when raising capital but to also consider which option has the most benefit for an entrepreneur’s business venture and way of life. Home equity loans may seem like an excellent alternative; however, if the business fails, then the entrepreneur may end up losing both their business and home. Insurance policy loans may also be tempting, but non-payment can result in the borrower losing value to their plan and in severe cases, they may even end up losing their entire life insurance policy. If an entrepreneur decides to take a loan against their retirement plan, they will be charged a 10% penalty if they are not of retirement age, and they may even be at risk for default if payments are not made. The most important thing to consider before choosing a funding option is to make sure that a company has the prospect of being successful. If a company is successful, then repayments can be made, and the entrepreneur will not be at risk for losing everything.

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