Gaining capital is one of the biggest challenges to starting a new business. Even if you have an amazing idea you can’t get grow a company without some form of ongoing funding. So how can you finance a new business?
Every business starts off in the negative, even if you’ve only paid out of your own pocket for advertising. Entrepreneurs are flourishing in the digital era, and they’re discovering new ways to finance their businesses.
Selling insurance policies and using tax-free benefits is one of the most emergent ways of funding a startup in 2021.
Where Do You Get Capital for a Business?
There are plenty of ways entrepreneurs can fund their dreams, including their own savings, borrowing from friends and family, personal loans and lines of credit. All of these result in some form of debt. Whether it’s formal or informal, it still creates pressure to repay.
Too much starting capital borrowed from a lender can ultimately form a negative cycle of repayment and interest. This can siphon your burgeoning revenue and lead to the downfall of your business.
But without enough capital, a company may fail to grow or ever take off at all. Besides the discouragement that can damper your entire motivation, this type of failure often leaves you financially worse for the wear.
When you owe money and you have no way to pay it back, you ultimately give up your dreams for something more stable but far more restrictive.
Life insurance policies have become a popular way of covering your business’ expenses without taking on large sums of debt. If you have a good policy, you can use it to generate a cash value that becomes a highly profitable financial asset. A life insurance policy can be a way to finance a new business.
Why Entrepreneurs Have Life Insurance
You can borrow against a policy with a cash value to get fast cash without mandatory monthly repayments or credit score requirements. This can be especially useful for someone whose low credit score ultimately causes them to be turned down for loans or only be offered loans with extremely high interest rates.
Interest rates on life insurance loans are low, and they’re not based on your credit history or financial background. Instead, the loans, which you typically borrow from your policy lender, come from your own money that you’ve put toward your policy’s cash value.
You can get a cash value with three types of life insurance:
- Whole, also called permanent coverage.
- Universal life insurance, which has flexible premiums for higher growth potential.
- Variable, which has a higher cash value earning potential.
Borrowing against each of these types of life insurance has its pros and cons.
Choosing the right policy from the start will give you the greatest flexibility. If your primary reason for taking out a policy is to accrue a decent cash value, then you’ll have to pay higher monthly premiums upfront.
Universal and variable policies are better for people who are interested in using their insurance as business capital. Whole coverage generates interest more slowly, and there is greater emphasis placed on its death benefit than cash value.
Using a Life Settlement to Fund Your Business
You can sell your life insurance policy to get access to a larger sum of money than you would receive by borrowing against active coverage. The caveat is that you are no longer the owner of the coverage. Any death benefit you paid for will no longer go to your beneficiaries upon your passing.
For someone who only took out the coverage for financial gain, this isn’t a problem. If you already have a policy to protect your family, you should consider how different plans and types of investment may impact them.
There are still instances where you may need the money for health reasons. If you’re diagnosed with a terminal illness, then you can use a viatical settlement. This will allow you to access your policy’s cash value and remove insurance cost from the budget.
You can review the complete guide on viatical settlement taxation, as well as other information on selling your life insurance, in this helpful online guide.
Benefits of Using Life Insurance to Fund Your Business
If you decide to borrow against your policy, there are several major advantages over traditional funding.
For starters, the taxable amount is lower. Although you do have to claim a portion of the cash value as income, you don’t have to pay for all of it. You also aren’t contracted to make monthly repayments. This is a huge relief if you’re already low on capital or don’t have a steady revenue stream yet.
Your loan’s interest rate and the value of your policy influence how much you can borrow and when you have to repay. The good news is that all of the money you borrow comes at a substantially lower interest rate than you’ll find with a small business loan or credit card.
Expect an interest rate that ranges somewhere between 5 to 9 percent. This manageable rate makes it easier for you to plan out how you’ll repay without raking up serious debt.
How to Finance a New Business – Summary
There are several ways to finance a new business. Selling insurance policies and using tax-free benefits is one of the most emergent ways of funding a startup in 2021.
This can provide you with the cash needed to grow your business at a great rate compared to other options.