Bootstrap Finance: 3 Options When Banks say “NO”

Finding enough money to launch or grow a company is tough… even when you’re not in the middle of a great recession.  We all look to banks to help out when we can, but bankers are not the most imaginative bunch.

If banks are not giving it up for you these days, try these 3 other sources of capital:

1. Hidden Personal Wealth

If you really believe in your business – and you should – then it’s natural that you should try to bankroll your own business growth.

Before you apply for a wallet full of new credit cards or a second mortgage however, look for other hidden sources of personal wealth.  Life insurance policies, 401(k) plans, IRAs and stock portfolios are among the most commonly overlooked sources of business capital.

Start with your life insurance policy.  If you have a whole life policy, you may have the option of withdrawing its cash value (before you die, I mean!).   Even better, you can pay the balance back (to yourself) at a flexible rate – or not at all if you chose.  In some cases, any unpaid balance will simply be deducted from the death benefit when you die.  You can’t take it with you anyway, so why not use it to grow your business?

Retirement accounts are the next logical place to look for hidden wealth. A 401(k) may have cash value that can be either withdrawn or used as collateral for a loan.  IRA accounts, including SEP and SIMPLE plans, typically have stricter limitations on borrowing or investing.

But wait, there’s something even better than borrowing against your retirement accounts.

Did you know you can actually invest your own retirement account into a company you own?   Doing so requires the cooperation of  your plan administrator or personal financial planner, but you can move your account to a firm that will coordinate this for you.  If you have questions on this, call your personal financial planner… or leave me a comment!  I’ll be happy to provide references.

Finally, don’t forget about your stock accounts.  Most brokerages offer “margin” loans, but your local bank or savings and loan may offer better interest rates.

2. Angel Investors

If your personal resources are tapped out, don’t despair.  The next best source of small-business capital may live right next door.

According to the University of New Hampshire’s Center for Venture Research, there are more than 400,000 active individual investors — or “angel investors” — who invest in more than 50,000 companies each year.  Many of the most active join “Angel Investor Clubs”, and there’s a great online resource to locate one near you — check out http://www.angelcapitalassociation.org/directory/.

In addition to these “active” angels, keep an eye out for more opportunistic individual investors. Casual investors – most often people you already know – pour millions of dollars into young businesses with little formality or fanfare.  Like the businesses they invest in, angels come in all shapes and sizes.

3. Commercial Lenders

The more critical your need for cash, the less useful traditional banks become. That’s where a commercial finance company can step in.

Commercial finance companies – also called commercial lenders – are not subject to the same regulations as a bank so they can look at riskier loans and different kinds of collateral. Of course, to make up for the increased risk commercial lenders may charge slightly higher rates of interest.

Collateral for a commercial loan could include things your community banker might not even understand, like accounts receivable, inventory and factory equipment.

And if you don’t have a lot of assets? Look for unsecured, mezzanine or subordinated loans. Rates for these loans are about equivalent to those of a credit card.

Subordinated and unsecured credit is widely available to businesses with solid operating profits, sometimes to the tune of two or three times annual cash flow.

The biggest commercial finance lenders include GE Finance, Textron and CIT. But there are hundreds of smaller shops that specialize in lending against particular types of collateral or to businesses within a particular industry.

So now you know.  When your banker says “NO”, the money hunt is just beginning.  Branch out to Angles, Commercial Lenders and to your own Personal Financial Planner for advice on less traditional (but maybe even more effective!) types of loans.

Got a good story about a banker saying “NO” to your business?  Share it with me in the comments below, and I’ll send you a free copy of my “Perfect Fundraising Kit”… containing everything you need to start a conversation with a bank, an angel, or a commercial lender.

Dedicated to your (Creatively Funded) profits,

David

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