Six Ways To Finance Your Home Business: Right Under Your Nose!
By George A. Parker

There are lots of ways to get additional
capital to expand a home-based business.

But before you look outside for financing,
leaving the decision about your company’s
progress and merits to someone else,
consider these six ways under your nose
to finance your home-based business:

Personal Savings

Savings are easy to tap and involve no paperwork. The negatives: if you use the
money in your business, it eats into your safety reserve and is no longer there for
emergencies. It diverts funds from a very low risk investment to a high one.

Whole-Life Insurance

Whole life policies accumulate tax-deferred cash value that you can tap for your
business. But the only way you can tap this cash without paying taxes is to borrow
against your policy. As long as you keep your policy intact and pay premiums when
due, loans remain tax-free.

The negatives: you will be converting a low risk investment into a high one; if you
decide to terminate your policy or if you default on repaying your loan, taxes will be
due on all cash value accumulated under the policy; if you die before your loan is
repaid, any distributions to your beneficiaries will be reduced by the amount of your
outstanding loan.

A Loan from Your 401-K Plan

You can borrow up to $ 50,000 of the money you have saved under many 401-K
plans. There are no credit checks. Interest is usually a percentage point or two above
the prime rate and the interest that you pay back to the plan will be tax-deferred to
the plan. Most loans are repayable out of salary deductions over five years.

The negatives: you will have less money invested toward retirement; the dollars
used to repay the loan will be after-tax dollars withheld from your paycheck; if you
fail to repay the loan, the IRS considers your failure a premature distribution -- you
will be charged taxes on the borrowed amount plus you may be assessed a 10%
early-withdrawal penalty.

A Home-Equity Loan

These loans do require that you apply and be reasonably credit worthy. You
generally can borrow up to 80% or 90% of the equity value of your home. Interest on
these loans is generally tax-deductible.

The negatives: you will reduce the equity value of your home by the loan amount;
you will be diverting funds from a relatively safe investment to a high risk one; if
you default, you put your house at risk of foreclosure. Think very carefully before
using this form of financing.

Personal Credit Lines and Credit Cards

They are convenient, versatile forms of financing. You can borrow and re-borrow up
to the line limit as needed.

The negatives: you will pay relatively high interest rates-- rates range from 12% to
over 18%; the minimum monthly payment on many of these arrangements will repay
the outstanding balance within 42 months; it is easy to dig yourself deep into debt
using credit lines and credit card debt; high outstanding balances against your line
can negatively impact your personal credit rating.

A Margin Loan

You can use margin loans for purposes other than buying additional securities.

Any margin loan will be secured by your equity shares. Rates are often below prime,
applying is relatively easy, and these loans have very flexible repayment terms.

Loans are initially limited to 50% of the purchase price of your equity securities.
Loan repayments are triggered when the value of your stock falls below the margin

The negatives: Because borrowings are predicated on volatile stock values, a margin
loan can be a risky proposition; if you default in repaying, the brokerage firm can
sell your securities to satisfy the loan; an untimely sell-off can have a devastating
effect on your portfolio and negative tax consequences.

The only safe way to consider a margin loan to finance your home-based business is
to limit advances to a relative low ratio of your stock portfolio value – say, 25% or

Most of these financing methods are under your control and don’t require business
plans or company financials to qualify. Although each of these methods has risks
and disadvantages, so do most external methods of financing. Before proceeding
with one of these financing methods, carefully consider the potential benefits, risks
and consequences. Whatever you decide, it helps to know the options right under
your nose.

About the Author: George Parker is a Director and Executive Vice President of
Leasing Technologies International, Inc. (“LTI”). Headquartered in Wilton, CT, LTI is
a leasing firm specializing nationally in equipment financing programs for emerging
growth and later-stage, venture capital backed companies. More information about
LTI is available at:
Title Leasing.
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