Written by Asheesh Advani
The credit crunch that began with mortgages has now spread to consumer loans and small-business financing. Banks have tightened their lending criteria and business owners will need to look elsewhere for financing. This shouldn't be a surprise to readers of this column because I've often complained that banks tend to ignore start-ups even during normal market circumstance.
The credit crunch has resulted in rising defaults for revolving credit in addition to mortgages; this could translate into higher fees and tougher underwriting standards if you plan to finance your business with credit card debt or home equity lines of credit. It's time to look for alternatives.
Borrow From Yourself
I've never supported the notion that entrepreneurs should borrow from their 401(k)s or retirement assets to finance a start-up, but in these difficult times, it's worth considering how to best use your savings to fund your business.
Typically, business owners rely on their savings for about 30% of initial start-up funding. Rather than taking this money from your retirement assets, consider liquidating some appreciated stock and lending it to your company. Lending the money to your company is better than purchasing equity in your company because you can pay yourself back at a later date if you've documented the loan properly. You should already have enough founder's stock. For amounts as low as $15,000, it's perfectly reasonable to use proceeds from future revenues or even future investors in your business to pay yourself back.