Borrowers who were seeking creative financing raised my antennae when I was in the lending business. It always meant something different to me than to my loan applicants. They were looking for a magic wand to turn bad proposals into good ones. These applicants had tainted credit, insufficient collateral, and refused to recognize the inadequacies of their deals.
Yet, every so often I hear of ways to finance small businesses that are indeed creative. More specifically, I have been looking at two vehicles to fund business startups and expansions when all else fails. In both cases, tainted credit and lack of cash flow are not factors. In one case there is an age threshold. In the other there is not. "To qualify for a reverse mortgage, unlike traditional (business) financing, credit scores and past credit history, good or bad, are not a factor," says Georgene Rivers, reverse mortgage specialist with Wells Fargo Home Mortgage in Florida and New York. "You cannot be declined on that basis."
Reverse mortgages are for homeowners of 62 years of age or older and have been around for some time. I thought the program was reserved for low-income individuals who needed a way to pay living expenses. But I never considered it to be a business-financing technique.
"You will never be asked for financials, tax returns, account receivables, length of time in business, nothing at all," Rivers says. "Loan proceeds can be used for any purpose at all, including eliminating existing mortgages, meeting daily and monthly living expenses and of course, business expenses."
Reverse mortgage borrowers can receive the proceeds as a lump sum, a line of credit to take down as needed or they can receive monthly payments.
Loan amounts are based upon the value of your home, and according to Rivers, the closing costs can run from four percent to six percent of your home's value. So if you pay it off quickly, the front-loaded fees are very expensive. But spread over many years, the fees are more palatable.
But even if you are not old enough to qualify for a reverse mortgage, you may be able to borrow from your retirement funds without paying an early withdrawal penalty or incurring a taxable event, according to Daniel DiLascia, a chartered life underwriter and registered representative with Colorado based Intervest International Equities Corp.
"A lot of business owners are liquidating an IRA (before age 59-1/2), which after taxes, penalties you will only clear half of the amount," he says. But instead, he shows his clients how to roll over an existing IRA or 401(k) "and start a new plan which they can borrow against." As a result, they avoid penalties and income-tax consequences.
But talk to your accountant before leaping into this complicated and controversial financing vehicle. It is not for everyone.
Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA's 2006 national "Journalist of the Year" award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at www.Twitter.com/JerryChautin