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Kevin J. Daum
This article was originally published in the August 9th,
2003 edition of the East Bay Business Times.
The need for short-term capital is the most common dilemma
facing most CEOs today. Leaders of small businesses find a
limited number of resources to fund short-term cash flow for
a growing company. The standard approach is to look to a bank
for a business line of credit but many CEOs are confused and
disappointed by the process and programs available.
The criteria for bank lines can be prohibitive for new companies
as a 2-3 year history is the usual minimum. Also, most larger
banks focus their business programs and services toward companies
with $5,000,000+ in annual revenues leaving smaller concerns
in the hands of New Account generalists in the branch. Odd
since companies this size equal only roughly one half of one
percent of U.S. companies today.
If you pass those tests, you can expect to surrender 3 years
of personal and company financials, business and personal
credit reports, a UCC filing, business plan and your personal
guarantee along with any other security attachments of their
choosing, like receivables if available. The line can range
from $50,000 on up depending upon your available security
but may be subject to re-analysis on an annual basis. Some
banks require you to annually pay down the line to $0 insuring
that it is not long-term financing.
The line will have a revolving limit with interest generally
based 1-3% over prime but may be readjusted based upon the
annual analysis of your company. Depending upon the terms,
the bank may have the right to call for your line to be paid
off and canceled at any time, leaving your company in a precarious
position.
If your company meets the extensive criteria for the Small
Business Administration (SBA) you may find some longer-term
alternative financing for newer ventures as well as established
firms. Most of the criteria of qualification will be based
upon financials as well. This is not a good program for those
in a rush and the money may not be used to repay debt or delinquent
withholding taxes. Even though the SBA guarantees the loan,
they will ask for your personal guarantee if you have ownership
greater than 20%. You can view the SBA size requirements at
www.sba.gov/size/indextableofsize.html
If your business history and financials don't seem to fit
with the Banks or the SBA, or even if they do, the best alternative
funding source may be you and your place of residence. Aside
from family and credit cards, which should be the last resort
financiers, most people forget about or refuse to consider
their house as a source of capital. The primary resistance
is usually the risk of losing your home, but the personal
guarantees mentioned earlier can put all of your personal
assets including the house at risk just the same.
So as long as you are betting the farm on your business so
to speak, you may as well reap the benefits of ease and dollars
associated with borrowing from your real estate. These can
include, ease of qualification, tax deductions and long term
fixed financing.
Whether refinancing a first trust deed or getting a Home
Equity Line Of Credit (HELOC) as a second, qualification for
these loans will be based primarily on the equity in your
house. No Income Verification loans are available and lower
credit scores of 620+ can still warrant competitive rates
equivalent to, if not better than the business lines. The
business financials or history does not have to factor in
the financial picture with many loan products.
There are many factors determining tax deductibility for
these loans. You may not be able to write off the interest
if your total loans exceed $1.1million or the original home
purchase price plus capital improvements plus $100,000, whichever
is less. Over these limits, the IRS is clear about not allowing
interest deductions on loans to your own business, even if
you charge the company interest.
The biggest attraction to dipping into the old homestead
is the availability of affordable programs. Long term business
financing with 30year fixed rates is unheard of and yet is
standard for home loans. Also the variety of low payment programs
like "Interest Only" and "Neg Am" ARMs can provide significant
cash flow benefits for money hungry businesses. Limits on
the amount of cash you can take out vary among lenders but
$5,000 to $500,000 can be easily accessible to those meeting
criteria.
Obviously, any decision such as this should be discussed
with your CFO and CPA but with the interest rates at their
all time lows, this could be the best time for your business
to bank on your home.
Kevin Daum is the Founder and CEO of Stratford Financial
Services, a Real Estate finance and education company, founded
in 1989. Stratford specializes in Purchase loans, Refinance
loans and Custom Home Construction finance and has successfully
financed thousands of clients. He is the author of "Building
Your Own Home for Dummies" (Wiley), as well as "What
the Banks Won’t Tell You." Mr. Daum was an Underwriter
for Plaza Savings and Loan and Key Bank of New York. He is
an INC 500 CEO and has been listed as one the 40 Most Influential
People Under 40 in the San Francisco Bay Area. He is the Global
Chair for the Edison Innovation Program with the Young Entrepreneurs'
Organization (YEO) and is a founding Board member of the Bay
Area Chapter of YEO.
Mr. Daum is a frequent contributor to numerous business
publications on the subjects of Real Estate and Small Business
leadership and speaks regularly on both subjects. He can be
contacted at kevin@stratfordfinancial.com.
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