SBA Micro Loan
This loan was designed to provide small, short-term loans to small business concerns and certain types of not-for-profit child care centers. The SBA makes funds available to specialty-designated intermediary lenders with experience in lending, as well as management and technical assistance. In addition, while the maximum loan amount is $50,000, the average microloan is about $13,000. Microloans can be used for purchasing a new business, working capital, purchase of inventory, supplies, furniture, fixtures, machinery, or equipment. Business financials may be required if you are looking for an amount over $25,000
SBA 7a Loan
The 7A is the most common SBA loan for both business start-ups and existing businesses. It's a very flexible loan that can be used for "any legitimate business purpose," including business acquisition, working capital, machinery, equipment, furniture, fixtures, and leasehold improvements. The SBA requires that a lender charge no more than Prime plus a margin not to exceed 2.75% and the rate you can expect to receive is typically based on the strength of your loan. Some lenders offer very good 3- or 5-year fixed rates that adjust after the initial fixed period. The typical 7A loan amount is from $100k to $5 million. The 7a is a collateralized loan, so you will need to provide some type of collateral, and have strong personal credit.
SBA 504 Loan
504 loans are less common for start-ups than 7A loans, and the requirements to qualify are very similar. A key difference between the 504 and the 7A is that the loan must include real estate or equipment. If you don't have real estate or equipment as part of the business, you will not qualify for a 504 loan. Because there is often real estate involved, the down payment is usually less than a 7A loan, typically 10%. The lending bank takes a first mortgage of 50% and the SBA guarantees the remaining 40%. Most 504 projects are in the $500k to $5 million range.
Retirement Plan Rollover Funding (401(k)/IRA rollover financing)
This funding strategy has been around for many years, and has become one of the more popular funding strategies used to purchase a new business or franchise, and is not based on your credit score. This strategy allows you to utilize the savings in your retirement plan to fund your new business. It's a common misconception that you can only use your retirement plan to purchase investments like publicly traded stocks, bonds, or mutual funds. However, in reality, you can use most retirement plans to buy a business or recapitalize an existing business without paying taxes or penalties. It's important to understand that this is not a loan, you are not borrowing against your 401(k). Your new retirement plan has invested in your business instead of another company's stocks or bonds. This strategy is often used to provide capital for the down payment on an SBA loan. We call this process our "Rainmaker Program."
What are some of the plans that qualify?
- 401 (k) Plans
- 403 (b) Plans
- 407 Plans (government agencies)
- Annuity Plans
- Cash Balance Plans
- Defined Benefits Plans
- Employee Stock Ownership
- IRAs
- Money Purchase Plans
- Rollover Plans
- SEPs
- SIMPLE Plans
The most common plans that don’t qualify are Roth IRAs and Roth 401(k) plans
Unsecured Business Line of Credit
An unsecured business line of credit is a form of revolving credit, and is the most accessible type of funding. Typically, the line of credit is available in amounts from $25K to $150K. The loan is based on an individual’s personal credit rating, so no business financials are required. The money can be used to purchase a business, expand an existing business, or as working capital. Often a business will use the credit line to manage the cash flow in a seasonal business.
Asset-Backed Loan
In the simplest meaning, asset-based lending is any kind of loan secured by an asset. Typically, these loans are tied to investment portfolios, inventory, accounts receivable, machinery, and equipment. Because the loan is secured by a hard asset, the interest rates on asset-backed loans are among the lowest available. An asset-backed loan is sometimes used to finance a business when the entrepreneur has low cost basis stock in their investment portfolio and doesn’t want to pay a capital gain on the sale of the stock. In this instance, the stock portfolio would be the collateral for the loan. The investment remains in the entrepreneur's name and the entrepreneur would continue to receive all the appreciation and dividends generated by the portfolio.
Equipment Leasing
Because of the low out-of-pocket expense, leasing can lower the initial cost of starting a new business. Leasing a product is similar to renting it; you pay the leasing company each month for the use of the equipment. A contract lasts a number of years, usually between 2 and 10, depending on the cost and usable life of the product. This means that you can have the full use (although you do not actually own it) of a piece of equipment without having to pay the full cost of the item at one time. Over the course of the lease, the leasing company will recover the price of the item plus their charges, meaning you only need a small deposit to start the lease. Equipment leasing is an affordable way to acquire equipment quickly without huge out-of-pocket expenses. To qualify for an equipment lease, you need to have a strong business model and good credit.
Merchant Cash Advance
A merchant cash advance provides small and medium-sized businesses with fast working capital. With a merchant cash advance, your future credit card sales are purchased at a discount in order to advance you a sum of money. Unlike a loan, it does not require any collateral or personal guarantee, and you don’t pay interest. The typical amount for an advance is $5k to $250K. The merchant cash advance is not based on business or personal credit, and is generally available to any business that processes credit cards as a form of payment.
