Borrow from yourself when starting a business

By Pat Sisneros and Juergen Kneifel <I>For The Herald</I>

Sometimes the greater challenge for entrepreneurs isn’t landing on a winning idea; it’s finding the money to start a new business venture.

It’s been said there are three common sources for funding — family, friends and fools. In reality, personal savings and investment are the top funding sources for start-ups.

Historically, many small business owners found easy access to cash for financing their business through their home equity. In today’s economic environment, with home values significantly deflated, this may not be practical. Most homeowners who’ve purchased within the past six years have witnessed a significant drop in their equity.

Robert Wolverton, a broker with Cobalt Mortgage, has seen the best and the worst of times in his 14 years in the business.

“Up until three years ago, it was common for entrepreneurs to simply take on a second mortgage to fund their business venture,” Wolverton said. “The process was simple, and homeowners were happy to draw from the market gains that had lifted their equity. Today, there are more entrepreneurs sitting on the sideline. And those who chose to draw funding from their home equity are refinancing their first mortgage with a cash-out option.”

Today, there is a silver lining, Wolverton said.

“With today’s rates still at historic lows, there are several good reasons to refinance: The borrower will likely lower their monthly payment and access the cash needed for their business enterprise,” he said.

Another funding target that some entrepreneurs have been known to tap is their 401(k) or other retirement source. This may be too great a risk for some, but if it means the difference between getting a business off the ground or simply sitting on the sidelines, there are those willing to take the leap. Some retirement plans also offer an option to take out a loan against a portion of the balance that has accrued.

So what about banks? Isn’t lending their primary line of business?

The rumor on the street is that banks are unwilling to lend money to small business and start-up companies. Perhaps there are too many restrictions and regulatory constraints on banks that stifle lending.

A recent survey by the National Federation of Independent Business found that last year only half of businesses seeking to borrow funds were able to obtain all or most of the money they needed. Compare this with the midpoint of the current decade where these types of borrowers indicated a 90 percent success rate. Yes, things have changed in the world of banking and finance. But in order to prime our nation’s economic engine, we need access to funding for small businesses and entrepreneurs in order to generate long-term growth and to create new jobs.

We were surprised to learn recently that Sam’s Club is getting into the banking game. Targeting micro-entrepreneurs and others who’ve historically struggled to get funding, Sam’s is working with Superior Financial Group to provide small business loans between $5,000 and $25,000 to Sam’s Club members in order to help them develop their enterprises. This sounds like a terrific opportunity and is quite entrepreneurial. This move could signal relief for some entrepreneurs who’ve tried several funding avenues only to wind up empty handed.

If all these funding ideas don’t pan out, there is no need to panic. Remember that there are still the Three F’s: friends, family and fools. Just a note of caution: When seeking help from family or friends who have the capacity to invest in your small business, consider the value of your relationship alongside the value of a loan or extending partial ownership. Often, the cost of losing family and friends is far too high a price.

Pat Sisneros is the vice president of College Services at Everett Community College. Juergen Kneifel is an associate faculty member in the EvCC Entrepreneurship program. Send comments to