Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
According to U.S. Small Business Administration (SBA) estimates, in 2003 there were approximately 23.7 million small businesses in the United States. In Minnesota alone, there were an estimated 464,946 small businesses in 2004. The SBA reported that it provided more than $50 million in SBA loans per day to U.S. small businesses.
While that may seem like a lot of loans, obtaining adequate operating capital can be a challenge. Before venturing on your own to secure a loan, the most important thing you should do is get some financial advice. Work with a knowledgeable adviser to evaluate the following initial funding options.
Traditional bank loans. When people need money, one of the most obvious options is a traditional bank loan. In fact, banks provide a substantial proportion of credit to small businesses. Bankers can tell you about their programs, and many bankers look for certain types of loans or certain types of industries.
Small Business Administration loans. When you’re looking to finance a business real estate purchase, refinance equipment purchases, business acquisitions, or working capital, you should also consider a guaranteed government loan.
The Minnesota District Office of the SBA has arranged numerous loan programs to assist small businesses, acting as a guarantor for your venture.
The loans are offered through banks and private lending institutions that partner with the SBA to help small businesses find the right financing options. This type of loan eliminates some of the common risks that lenders assume, so terms can be longer and loan amounts larger than what might be offered outside of an SBA loan program.
The SBA has a variety of loan programs to meet different needs and eligibility requirements. A short list of SBA’s three most popular loans include:
7(a) Loan Program. This is the SBA’s most popular loan program where you can borrow up to $2 million from your local 7(a) lender, backed by a partial guarantee from the SBA. 7(a) loans can be used for working capital, asset purchases and leasehold improvements.
504 Loan Program. This loan program helps supply funds for asset purchases, such as land or equipment. Typically, a bank or other lender funds an asset purchase combined with a second loan from a certified development company (CDC) that is funded with an SBA guarantee for up to 40 percent of the value of the asset.
7(m) Microloan Program. This program is currently under budgetary review, but it’s intended to provide loans of up to $35,000 that can be used for various start-up expenses. SBA funds the loan, rather than a bank, and the loans are administered to business owners by nonprofit community-based intermediaries. The SBA Web site (www.sba.gov) provides a listing of intermediary micro-lenders in Minnesota and other areas.
Securities-based financing. You might also consider securities-based financing when you want to increase buying power.
This is a competitive financing alternative that enables you to leverage the eligible securities in your investment portfolios — stocks, bonds, approved mutual funds, treasuries or certificates of deposit — without liquidating them. With this strategy, you can defer potential capital gains taxes that would result from selling assets. In addition, you can continue to trade pledged securities, subject to certain restrictions, potentially benefiting from market opportunities.
That said, borrowing against securities and using stocks as collateral involves a high degree of risk. If the market declines, you may have to meet a “maintenance call” by depositing additional cash or collateral. If you are unable to do so, the lender can sell your securities without notice and with potentially adverse tax consequences.
When considering a securities-based loan, you should take into account your individual requirements, portfolio composition and risk tolerance, as well as capital gains taxes, portfolio performance expectations and investment time horizon.
Home equity loans. Borrowing against home equity is also a popular option for many small-business owners. It also means, of course, that you’ll have to make higher monthly payments on your mortgage.
To accommodate the increased monthly payments, you can set aside some of the proceeds from the home equity loan to help make the larger mortgage payments until the business provides you with a steady salary.
Also beware that you’re pledging your house as collateral to the loan, and if you don’t pay, the bank gets it.
Insurance policies. While you may pay a plethora of insurance policies each month, you can only borrow against your whole life policy.
Most companies lend up to 90 percent of the policy’s cash value while keeping your policy intact as long as you pay the premiums on term. Loans made against your insurance policy can be reasonable because the rates are correlated to the key money-market rate.
However, if you die with an outstanding loan on the policy, depending on the policy, your heirs might receive lessened benefits, or none at all.
Friends and family. Friends and family can be a worthwhile source of capital because they care about you and want to see you succeed.
However, be wary when borrowing money from loved ones. Money can stir up personal and emotional issues that can be avoided by using a third-party loan. Also, family members may not have deep pockets.
If you do borrow money from a loved one, be sure you are clear about the terms of the loan, how they want to be repaid (with a percentage interest, on a schedule, etc.). Treat it like a business deal with a formal contract. This will help you avoid confusion, hurt feelings and even potential legal consequences.
Credit cards. Using a credit card to fund your business can be a quick and easy way to generate capital, but it can also be costly depending on the interest rates you secure.
Many business owners will use credit cards as a temporary solution to fill the gap before they can raise adequate capital. However, most financial professionals would agree that the credit card should be repaid immediately after you secure traditional capital.
Securing financing is often the main barrier standing in the way of potential business owners. But there are many financing options available, so speak with your financial adviser, accountant or lawyer to determine your best option.
Being your own boss no longer has to be a pipe dream if you know how to acquire the right money and right advice to set you on the path toward entrepreneurship.
