If you’re starting a small business, one of the first lessons you’ll learn is that it takes money to make money. A business is an investment, and if you hope to generate a profit, you’ll have to deploy capital (whether big or small) upfront to get your venture off the ground.
There are a variety of funding options to help entrepreneurs secure their capital needs, from 401(k) business financing (also known as Rollovers for Business Start-ups) to portfolio loans. But each method comes with its own set of pros and cons, and it’s important to evaluate all the options before making your final decision.
One of the first steps in choosing a financing method is doing a cost analysis to evaluate the overall expenses of each technique — not just the initial fees. A cost analysis should factor in interest rates, monthly and total payments, and other options to estimate the total payback amount, allowing you to see what the cost of securing capital really is.
To give you an example, below is a graph showing the approximate costs associated with $250,000 of capital, including estimated interest rates (orange), monthly payments (black numbers above each bar) and total payment amounts (blue).
The Carrying Costs on $250K of Business Capital*
As you can see, total payment amounts vary significantly by method. Using a 401(k)/IRA rollover may avoid interest rates and monthly payments altogether. SBA loans offer low interest rates to keep the total payback amount more manageable. But portfolio loans can boast the lowest monthly payments, granted you own stocks, bonds or other securities.
Of course, there’s no one business financing method that’s right for everyone. Each entrepreneur has unique needs, and what’s best for one may be all wrong for another.
To help you narrow your focus, ask yourself these four questions:
- Do I want to use my money or someone else’s?
- Do I want the smallest monthly payment possible?
- Do I mind guaranteeing the debt with personal assets?
- Do I want to pay off the debt as fast as possible?
Working with a qualified financing firm can also simplify the process. Not only can they answer your questions about the specifics of each method, but they can also make suggestions as to which option(s) will best suit your needs.
To see the financing solutions you may be eligible for, fill out this quick pre-qualification tool.
*This graphic is for informational purposes only. Interest rates and terms vary by lenders.
The comparison was created using assumptions, which may vary depending on the financing vehicle, or combination thereof, you deploy. Our assumptions include, but are not limited to: recordkeeping fees at $119/month over 10 years; SBA loans amortized over 10 years at 6%; cash-out refinance of home equity factored on a 30-year, fixed mortgage at 5%; home equity line of credit factored over 20 years at 4.5% (the first 10 years at interest only, and then fully amortized for the final 10 years. The payment was $938 for the first 10 years, and then ballooned to $2,591 for the second half of the term). Because portfolio loans are interest-only, these were interest-only for the first 10 years and assumed a sale of the business and full repayment of capital at that moment in time. Because unsecured loans have minimum payment schedules that are difficult to calculate, these were factored on a fully amortized, 10-year loan at 14%.
* The initial ROBS investment can be repaid or see a return on the investment through a stock buy-back, paid dividends or the sale of the business. There are no payments. One should consider whether Required Mandatory Distributions are applicable.
Always consult a financial and/or legal professional when making any financial or small business investment decisions.
