Ways to Finance Business --
Pros and Cons

If you’re thinking about ways to finance business, you may have already considered some of the ideas below. However, it is important to consider the pros and cons of each method of funding before making your final decision. Also, this is an area where business advisors, such as a lawyer and/or accountant, can help you consider these ideas to devise a strategy to protect your business so that you can do what you want-–earn multiple income streams!

Savings: your money in your bank, savings or investment account.

Pros: You maintain entire ownership of the business, easy and fast to obtain.

Cons: Reduces your retirement nest egg, and emergency funds. You lose the ability to leverage your money.

Home: Using equity in your home through refinancing or a line of credit.

Pros: These usually have low interest rates and the interest is tax-deductible, plus it is easy to obtain and you can access it fairly quickly.

Cons: Using this equity results in higher monthly house payments --your home will be at risk if you become unable to make payments.

Credit Card: The plastic in your wallet.

Pros: You maintain ownership of the business, funds are easy to obtain and quickly accessible.

Cons: Usually high interest rates, and you must make a personal guarantee, which may put other personal assets at risk.

Friends/Family: People who know you and are willing to risk their money with you.

Pros: Quick access to money, plus future investors like to see that people who know you are willing to take risks with you.

Cons: If you fail at your business venture or do not pay them back, you must live with it (and the accompanying drama which usually occurs as a result).

Life Insurance: borrowing money against the cash value of your life insurance policy.

Pros: You usually don’t have to repay the loan against your policy, they often have low interest rates, and they are relatively easy to obtain.

Cons: Borrowing against your life insurance may trigger certain tax events (make sure to enquire about this before borrowing!), any unpaid loan balance and accrued interest will be subtracted from what the policy's beneficiary receives at the death of the insured.

401k: borrowing money against the balance of your 401k retirement funds.

Pros: Easy to obtain, no credit approval process, interest on the loan is repaid to you, interest rate is generally very low.

Cons: Slowing or completely halting the growth of your retirement fund (note: some funds will not allow you to contribute if you have an outstanding loan), leaving your job voluntarily or involuntarily triggers a repayment period of 60 days. If unpaid, you will have a 10% penalty plus state and federal taxes, you cannot deduct your interest expense.

IRA: Taking money out of the balance of your IRA funds. (NOTE: this is unlike borrowing from your 401k. You cannot borrow money against your IRA—but you may take out money from your account for a maximum of 60 days, starting on the date you receive the money, or distribution.)

Pros: Easy, fast.

Cons: 60-day time limit and subsequent harsh taxes and penalties for failure to replace money.

Angel Investors: Individuals or groups who are already financially successful that invest in companies in exchange for an ownership percentage. These are typically people that are looking to support certain types of industries or segments of the population, or businesses that serve certain groups of persons or areas.

Pros: Usually interested in your success on a higher level that a bank or other type of investor, can provide valuable expertise, resources and mentoring. Valuable relationship as these are experienced entrepreneurs.

Cons: Sometimes difficult to obtain, especially for a brand new business.

Venture Capital: Professional investment firms that invest in small to large business enterprises in exchange for a percentage of ownership.

Pros: can raise substantial money for the business and gives the business additional credibility.

Cons: You generally must have already proven that your business is successful—these are usually not start up funds. Also, these are usually for large amounts of funds and are generally not appropriate for businesses needing funds under one million. Venture capitalists can take over the business if given enough ownership percentage.

Strategic Partner: possibly a joint venture or a company that would benefit from your product or service.

Pros: May put up all or part of the money if to their benefit, may provide valuable expertise, resources and introductions to help you.

Cons: Often have ownership and decision-making power in the company, reducing your ability to make independent decisions.

Partner: a partner that is also part owner, starts or builds business with you.

Pros: You don’t have as high of a financial contribution, partner fills in the gaps with knowledge and skills, ideas.

Cons: Will be more difficult to make independent decisions, do not have sole ownership of the business.

Ways to Finance Business-Loans

Bank Loan: business loan which must be paid over a certain period of time.

Pros: You maintain ownership.

Cons: You generally have to personally guarantee the loan.

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