If you want to expand your business, naturally you will require fresh capital. There are several ways to get it. But, before going in for finance from outside, it is better you consider the various options that present themselves before you. The options are: Personal Savings; Whole-Life insurance; Loan from 401-K Plan; Home equity loan; Personal credit lines and credit cards; & Marginal loan. Let us discuss the various sources of home business loans, highlighting their advantages and disadvantages of each of them.
Personal Savings – This is very easy to touch and does not require any processing. If you take out this money for business, it erodes into your reserve and will not be available during an emergency. It also amounts to diverting the funds from a low risk investment to that of a high risk one.
Loan from 401-K Plan – One can borrow up to a maximum of $50,000 of the amount saved under this plan. There is no tax and no credit check. Interest rate is also low. Unsecured loan is repayable in five years and recoveries of loans are through deduction in salaries. The disadvantage of this type of home business loan is that the amount invested towards retirement will become less. In the event of non-repayment of the loan, it will be treated as premature distribution, and tax will be levied on the loan amount and, in addition, a 10% penalty also will be there for early withdrawal.
Whole-Life Insurance – The funds accumulated in this policy could be utilized for business that too tax free. But that is possible only if you take a loan against the policy. Till such time the policy is in force and the premiums are paid regularly, no tax will be there for the loan. There is a possibility of a low risk investment becoming a high risk one. In case of termination of the policy before maturity or default in loan repayment, there will be tax on the full cash value of the policy. So, in case of death before this home business loan is settled, the beneficiaries will get only a reduced amount, after adjusting dues against the loan.
Personal Credit lines and Credit Cards – These types of home business loans are very handy, and you can borrow any number of times, of course, up to the limit allowed. High interest rate is one of the main disadvantages. Maximum time limit allowed to clear the dues is 42 months. By using these options, you will be allowing yourself to be thrown into quagmire.
Home Equity Loan – You have to apply for this personal loans with bad credit; and to do it, you must have a reasonably good credit. Between 80% and90% of the value of the house could be borrowed. Interest on the loan is eligible for tax deduction. The value of the house gets reduced by the loan amount. You are going to utilize the funds for business, which is a risky one. In case of default, there is the risk of foreclosure and the house will have the impact. So, you have to be very careful about using this option of home business loan.
Marginal Loan – This can be easily obtained, against your shares, and rates are reasonable and terms of repayment flexible. The loans are limited to 50% of the value of your shares. In case of default, brokers might sell the shares, which will result in reduced value of your portfolio. However, if you avail of a loan, only up to a reasonable limit, say 25% or less, the consequences will not be bad.