Updated: Nov 24, 2020
Covid-19 has caused the United States’ economic status to fluctuate between uncertain, devastating, and surprising. Not many people expected the housing market to boom with high housing prices and record low mortgage rates. With mortgage rates being so low, doesn’t that mean it’s also a great time to take out a business loan to finally finance that million dollar business idea? The market is bound to bounce back after all. Should you go to a national bank? A private lender? How about trying your luck on Kickstarter? Before you take the plunge, remember there will always be those who will exploit and take advantage of others. Think you’re too smart to fall for any “tricks” lenders may try to play? Psychologists say those who think they will never fall for tricks or scams are actually more likely to be deceived.
Don’t let fancy terminology and low numbers fool you into thinking you’re getting a great deal on a loan. Business cash-advance companies often advertise their loans with a factor rate of 1.1 to 1.4 (and sometimes even higher). 1.4 doesn’t seem like a high number at all, right? A factor rate is a complicated way to refer to interest rate, where a factor rate of 1.1 equates to 10% and 1.4 equates to 40%. There are those who will unknowingly accept a high interest loan, but you now know what to look out for and that there are better options out there.
Here are three little known finance strategies that are as creative as they are profitable:
1. Get Creative With Loans From Friends, Family, and Business Partners
Private equity firms and angel investors are commonly discussed by small business venturists, but these avenues are often oversaturated with competition. Instead, offer a revenue share plan to pay back the people who believe in you most. If you are already in revenue, or will be in revenue very soon, this is a great option that will give your personal lender a sense of security in the form of monthly checks. With this model, if you take a $10,000 loan from your aunt at a 3% revenue share at a payback rate of 30%, you will give your aunt 3% of your revenue until you pay her back $13,000. You get to start your million dollar idea, your aunt adds a little to her savings, and, most of all, the terms are 100% transparent.
2. Secure a Small Business Loan Using Term Insurance
Oftentimes, banks won’t issue a loan to a small business owner who does not have life insurance. Founder and CEO of True Blue Insurance, Brian Greenberg, shares that many small business owners struggle while trying to obtain an insurance policy, and still pay an immense premium just to secure a business loan from a bank. However, when a small business owner already has a substantial life insurance policy, they are able to obtain a loan just by assigning the required benefit to the bank. It’s far simpler than scrambling to prove your ability to repay the loan while simultaneously agreeing to an outrageous interest rate.
3. Make Your Taxes Work For You
You have your million dollar idea. Great! As Raoul Davis, CEO of Ascendant Group, once said, “you don’t need to walk off the plank and yell, ‘Geronimo!’ into the deep blue ocean with no life raft.” Now is the most vital time to stay prudent and calculatingly strategic. Aside from your business, the other greatest investment you will make is hiring a superb tax firm and CPA to navigate the confusing and ever changing tax laws. Your CPA is an excellent resource who will help determine how to finance your venture through tax savings using a complaint tax strategy. By creating a formal plan and meticulous record keeping, it is possible to repay your initial investment, and reline your savings account, with tax refunds.
Convincing a bank that your idea really will profit a million dollars is hard. Navigating the technical language of lenders is even harder. With the right creative business model and the right people guiding your decisions, you will be able to optimize revenue production and realize your dream of owning your own business. Just be careful that you are doing what’s best for you and not what’s best for the bank.