Entrepreneur’s Wealth Digest
Running out of cash is an incredibly stressful situation for a business owner. In this article, I give some ideas for places to raise cash that most entrepreneurs don’t typically think of, and discuss the tradeoffs for each. We have all had sleepless nights wondering how we are going to get through the next period in our business and find the money to keep it all together. Even though I discuss some tactics below, maybe the most important piece of advice I can give is to not go through that time alone. Every business owner has had these issues at some point. Every CPA, financial advisor, and business coach who works with business owners has worked through these issues. Feeling like you are struggling is isolating but it doesn’t have to be. Reach out and ask for help or just a friendly ear, because sharing the struggle makes it easier. You are not alone, so share what your challenge is and ask for help thinking through the problem.
When you are in a tight spot with liquidity, where do you go to source the cash? Below I focus on things you can implement relatively quickly, most within a few weeks or even a few days. You have tools like taking on outside investors and selling equity or merging with a competitor, but if you are in a liquidity crunch, in most cases it is about making it through a rough patch and not a strategy change. Those bigger re-structuring strategies have timelines in months or years so I leave them out of this discussion.
If you have an existing business banking relationship, the easiest call to make is to that bank to ask about increasing your business line of credit borrowing limit. Be honest about the challenge you have in front of you and what you need to solve it. Business banks value their relationships with successful businesses and want to maintain them for the long-term so they have an incentive to help you through a short-term rough patch. You still may get a ‘No’ for an answer but it doesn’t hurt to ask the question.
Consider looking through your payroll provider for lending offers from their partners as well. They often have payroll finance options for exactly this purpose, to help you through a payroll period or two.
If the pinch point is around financing equipment or business real estate improvements, research lenders in your particular industry. These typically have quicker approval timelines if they work specifically in your industry and are well-versed in the financials of your type of business.
If business lending isn’t an option, you can look at several types of personal lending and either loan or contribute that capital to your business. Unsecured lines of credit are an option and are typically based on your personal credit score and a review of your current financials. Rates and approval odds vary by lender but if you have great credit they can be a helpful option.
If you have an investment account, many custodians or brokerage firms partner with banks to offer portfolio-based lending where the value of the account is used as collateral to secure a line of credit. If you have large unrealized capital gains on the assets in that account that would generate a large tax bill if liquidated, using this option can be a very tax-efficient tool to raise cash.
If you or your spouse have a 401k loan in a plan that allows for loans you can borrow from your 401k and repay yourself interest over time. This can be an effective tool but is limited to 50% of the account value up to a maximum of $100,000. You also miss out on any investment gains on the loaned money and need to pay tax on the interest you paid yourself when you ultimately withdraw from the account in retirement. For short-term use, this can be effective.
Lines of credit or cash-out refinances of personally-owned real estate are also tools at your disposal. They are typically at the longer end of the approval and funding timeline for tools in this article, usually 30-60 days due to the need for appraisals and underwriting. However, if you have significant equity available in your properties they can fit the need and likely have a lower interest rate than any of your other options.
At this level, you have likely exhausted the other options listed above and we start getting into tools with larger tax consequences.
You can liquidate an investment account, but keep in mind that you will be paying capital gains tax, which, at the top capital gains bracket, plus the 3.8% Medicare investment income surtax, equates to a 23.8% Federal rate plus any state-level gains tax.
You can liquidate a 529 college savings account but at the cost of paying capital gains tax on the amount of gains in the account plus a 10% penalty. This can also be emotionally difficult due to those funds most often being earmarked for education for your children, but those accounts can be rebuilt over time.
You can also liquidate retirement accounts but at a significant tax cost. When liquidated, those funds are taxed as ordinary income; if you are under age 59 ½ you will also pay a 10% penalty unless you qualify for an exception.
If it is down to these tools or a business failure it may make sense to use them and protect your business equity but be sure you review all the tax implications with your financial and tax team before using them.
You are not alone if you are in one of these rough patches! Use the resources of your peers, mentors, CPAs, and financial team to help you make good decisions and get your business back on the road to growth!
If you have a question or simply want to talk through your financial planning, we are here to help.
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DISCLOSURE: Jarrod Musick is an officer of Destiny Capital and Entrepreneur Aligned, a DBA of Destiny Capital. This article is for informational purposes only and should not be relied upon as a basis for your investment, business, or personal financial decisions. We recommend consulting with your wealth advisor, CPA/tax advisor and/or attorney, as applicable to your situation, prior to implementing any new tax, legal, or investment strategy.
Jarrod was born into financial planning and solving financial problems. With his financial advisor father Steve telling stories about finance around the dinner table from an early age, the idea that everyone has a different financial situation was always there. After an early professional career spent in nonprofit and government, Jarrod came back to his roots helping people plan and invest in 2011. Since then, he has worked with individual clients, led internal teams and ultimately became partner and the CEO of Destiny Capital in 2017. With a passion for helping entrepreneurs change the world, Jarrod ultimately oversaw the creation of Entrepreneur Aligned in 2020. With both Destiny Capital and Entrepreneur Aligned, Jarrod leads teams that help people live lives of abundance where money is simply a tool to let everyone be a positive force for the world around them. When he isn’t working with the talented teams for EA and DC you can find him chasing his twins, wily trout or a podium spot at an OCR race.