Paying out of pocket for repairs and renovations is one of the more unfortunate aspects of home ownership. Large, costly renovations may occasionally be necessary in order to get your home ready for sale, while emergency repairs pose the risk of draining your bank account with little warning. If you own a home or are thinking of buying one, it is immensely helpful to learn how to finance home repairs before they arise. The guide below covers a few of your options for paying for home repairs.
Steps.
1. Refinance your mortgage to obtain cash for home repairs. A popular way to pay for home repairs and renovations is through a "cash-out refi," which is simply a way of swapping your existing mortgage for a new one and converting some of your home equity to cash in the process. Your current mortgage lender can help you understand your options for refinancing. Note that liquidating your equity in this way will generally cause your monthly payments or mortgage term to increase.
2. Obtain a home equity line of credit. A home equity line of credit functions like a credit card, with an open-ended term, a credit limit, and a minimum monthly payment based on your outstanding balance. This type credit makes sense for financing home repairs or remodeling projects because these projects tend to increase your home equity anyway.
3. Seek out a second mortgage. A second mortgage can be an unattractive option as it can tend to overburden you with debt, but for home repairs with an end in sight they are helpful. A second mortgage is a loan secured on your accumulated equity. The interest rate will be higher because your primary mortgage lender is given preference over your new lender in case of insolvency; for this reason, try to keep the size of your second mortgage as small as possible.
4. Determine if you qualify for a government loan. In the United States, the Federal Housing Administration runs a loan program called Title 1 for homeowners with very little equity. These loans are made by banks and backed by the federal government, and can be used to finance essential repairs such as structural and electrical problems.
5. Use a credit card for small, emergency repairs. While credit cards typically carry higher interest rates than loans secured on your home equity, they make sense for funding small home repairs. A credit card is available for use immediately and requires no paperwork, unlike other financing options.
6. Borrow from your 401(k). Many employers allow borrowing from your 401(k) to fund home repairs and renovations. This option is low-hassle because the money is already yours, so there is no paperwork or credit check. However, you are required to pay the borrowed money back into your 401(k) before leaving the company.
Tips.
If performing home repairs yourself, it is best not to skimp on materials. Durable, high-quality materials may cost more upfront, but will generally last much longer and prevent you from having to repair or replace materials later.
Warnings.
Avoid entering into financing arrangements directly with the contractor performing the work. These types of deals often carry high interest rates and hidden fees.
Paying out of pocket for repairs and renovations is one of the more unfortunate aspects of home ownership. Large, costly renovations may occasionally be necessary in order to get your home ready for sale, while emergency repairs pose the risk of draining your bank account with little warning. If you own a home or are thinking of buying one, it is immensely helpful to learn how to finance home repairs before they arise. The guide below covers a few of your options for paying for home repairs.
Steps.
1. Refinance your mortgage to obtain cash for home repairs. A popular way to pay for home repairs and renovations is through a "cash-out refi," which is simply a way of swapping your existing mortgage for a new one and converting some of your home equity to cash in the process. Your current mortgage lender can help you understand your options for refinancing. Note that liquidating your equity in this way will generally cause your monthly payments or mortgage term to increase.
2. Obtain a home equity line of credit. A home equity line of credit functions like a credit card, with an open-ended term, a credit limit, and a minimum monthly payment based on your outstanding balance. This type credit makes sense for financing home repairs or remodeling projects because these projects tend to increase your home equity anyway.
3. Seek out a second mortgage. A second mortgage can be an unattractive option as it can tend to overburden you with debt, but for home repairs with an end in sight they are helpful. A second mortgage is a loan secured on your accumulated equity. The interest rate will be higher because your primary mortgage lender is given preference over your new lender in case of insolvency; for this reason, try to keep the size of your second mortgage as small as possible.
4. Determine if you qualify for a government loan. In the United States, the Federal Housing Administration runs a loan program called Title 1 for homeowners with very little equity. These loans are made by banks and backed by the federal government, and can be used to finance essential repairs such as structural and electrical problems.
5. Use a credit card for small, emergency repairs. While credit cards typically carry higher interest rates than loans secured on your home equity, they make sense for funding small home repairs. A credit card is available for use immediately and requires no paperwork, unlike other financing options.
6. Borrow from your 401(k). Many employers allow borrowing from your 401(k) to fund home repairs and renovations. This option is low-hassle because the money is already yours, so there is no paperwork or credit check. However, you are required to pay the borrowed money back into your 401(k) before leaving the company.
Tips.
If performing home repairs yourself, it is best not to skimp on materials. Durable, high-quality materials may cost more upfront, but will generally last much longer and prevent you from having to repair or replace materials later.
Warnings.
Avoid entering into financing arrangements directly with the contractor performing the work. These types of deals often carry high interest rates and hidden fees.
You might find the perfect investment property, but before you can buy it you need to obtain financing. Many people will go to a bank and ask for a conventional loan with a repayment period of 25-30 years. Before doing so, however, you should analyze your credit history to check that you are a good credit risk. You have more options than simply relying on a conventional loan. For example, you could cash out the equity in your home or seek owner financing of the investment property.
Method 1 Obtaining a Conventional Loan.
1. Pull together a down payment. You can’t rely on mortgage insurance to cover your investment property. Accordingly, you will need a sizeable down payment, around 20-25%.
2. Consider a neighborhood bank. Smaller banks might be more flexible about lending to you if you don’t have a large down payment or if your credit score isn’t perfect. Local banks also may have a stronger interest in lending for local investment, so they are a good option.
You might not know anything about smaller lenders, so you should do as much research as possible. Ask people that you know whether they have ever done business with the bank.
You can also check online. Look for reviews.
3. Gather necessary paperwork. Before approaching a lender, you should pull together required paperwork. Doing so ahead of time will speed up the process. Get the following.
two months of bank statements, prior two months’ statements for investment accounts and retirement accounts, last two pay stubs.
information about self-employed income, such as last two year’s tax returns or business financial statements, driver’s license.
Social Security card, papers related to bankruptcy, divorce, or separation (if applicable).
4. Work with a mortgage broker. A mortgage broker will apply for loans on your behalf with many different lenders and will compare the rates. The broker can also try to negotiate better terms for you. Using a mortgage broker is a good idea if you are too busy to comparison shop by going to many different lenders.
Mortgage brokers don’t work for free. You typically will pay about 1% of the loan amount. For example, if you borrow $250,000, then you can expect to pay around $2,500 to the mortgage broker.
You can ask other investors or a real estate agent for a referral to a broker. Before hiring, make sure that you interview the person and ask how much experience they have and what services they offer.
5. Compare loans. If you don’t want to work with a mortgage broker, then you will need to educate yourself about the basics of home financing. You might be an experienced pro who has borrowed before. However, if you haven’t, then remember to consider the following when comparing loans.
Interest rates. An interest rate is a percent of the loan amount that you pay as a privilege for borrowing the money. Interest rates can be fixed for the entire length of the loan or fixed for only a portion of the loan term.
Discount points. For some loans, you can pay points, which will lower your interest rate.
Loan term. This is the length of the loan. A shorter loan will cost more each month, but you will pay it off sooner and with less interest.
Origination charge. This amount of money covers document preparation, fees, and the costs of underwriting the loan.
6. Seek pre-approval. You should try to get pre-approved for a loan before searching for properties. Make sure to request the pre-approval in writing because sellers might want to see that you are pre-approved.
7. Don’t forget other team members. Purchasing investment property requires the expertise of many different professionals. You should begin assembling your team early—even before you get financing. You will probably need the help of the following people.
An accountant who can help you understand investment tax strategies.
A realtor who can help you sign an appropriate real estate contract.
An attorney who can help you protect your assets, for example by forming a limited liability company to hold the property.
An insurance agent.
Method 2 Using Other Finance Options.
1. Use the equity in your home. You might be able to use the equity in your current home to purchase an investment property. Generally, you can borrow around 80% of your home’s value. There are different ways you can tap the equity in your home, such as the following.
You could get a Home Equity Line of Credit (HELOC). A lender will approve you for a specific amount of credit, and you use your current home as collateral for the loan. The credit is available for a certain amount of time. At the end of this draw period, you must have paid back the loan.
You might also get a cash-out refinance. The lender will pay you the difference between the mortgage and the home’s value, but is usually limited to 80-90% of the home’s value. For example, if you have $20,000 remaining on your mortgage, but your home is valued at $220,000, then $200,000 could be available. You could get 80-90% of $200,000 ($160,000-180,000). This option usually has a lower interest rate than a HELOC.
Both a HELOC and a cash-out refinance put your home at risk if you can’t make repayments. For this reason, you should think carefully before tapping the equity in your home to finance investments.
2. Obtain a fix-and-flip loan. You might be able to get this type of loan if you want to purchase a property in order to renovate and then quickly sell. The loan will be short-term and is secured by the property. Fix-and-flip loans have high interest rates, so you need to renovate and sell quickly.
You might find it easier to qualify for a fix-and-flip loan compared to a conventional loan. However, lenders will still look at your credit history and income.
The lender will also want to know the estimated value after repair, which can impact whether they extend you a loan and the terms.
3. Research peer-to-peer lending sites. Peer-to-peer lending connects investors with lenders who are willing to lend. Two of the more well-known peer-to-peer lending sites are Prosper and LendingClub.
Peer-to-peer lenders will require that you complete an application. They look at your credit score and credit history. They may also have minimum credit scores in order to qualify.
You might not be able to get a large personal loan through peer-to-peer lending. However, small businesses can typically borrow more, so if you create an LLC then you might be able to borrow up to $100,000.
4. Find a business partner. You might not be able to secure a loan on your own, in which case you will need to consider other options. One option is to find a business partner who you can invest with.
You will want to screen any potential business partner, just as a bank would screen you. If you are counting on the partner to help pay for the loan, then you will need to check their credit history and employment.
You also need to consider how you will hold the investment property. For example, it might be best to create an LLC and to both be owners of the LLC. The LLC will then hold title to the investment property.
5. Consider owner financing. With owner financing, the owner lends you the money that you use to buy the property. Sometimes the owner will lend only a portion of the price, which you then supplement with a conventional loan. You should analyze the pros and cons of owner financing.
A benefit of owner financing is that an owner might be willing to lend if you don’t have perfect credit or a huge down payment available. You and the owner can work out loan terms that are acceptable to both of you.
Typically, the seller’s loan will be for a short period of time (such as five years). At the end of the term, you are obligated to pay off the loan with a “balloon payment.” This usually means you need to get a conventional loan to make this balloon payment. You should analyze your credit to see if you can qualify for a conventional loan in the near future.
See Owner Finance a Home for more information.
Method 3 Analyzing Your Credit Score.
1. Obtain a free copy of your credit report. Your credit score will have the largest impact on your ability to get a loan, so you should obtain a copy of your credit report.[18] You are entitled to one free credit report each year from the three national Credit Reporting Agencies (CRAs). You shouldn’t contact the CRAs individually. Instead, you can get your free copy from all three using one of the following methods.
Complete the Annual Credit Report Request Form, which is available here: https://www.consumer.ftc.gov/articles/pdf-0093-annual-report-request-form.pdf. Once completed, submit the form to Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281.
2. Find errors on your credit report. You should closely look at you credit reports to find any errors that might lower your credit score. If your score is below 740, then you will probably have to pay more to borrow. For this reason, you should do whatever you can to increase the score. Look for the following errors.
credit information from an ex-spouse, credit information from someone with a similar name, address, Social Security Number, etc.
incorrect payment status (e.g., stating you are late when you aren’t), a delinquent account reported more than once.
old information that should have fallen off your credit report, an account inaccurately identified as closed by the lender.
failure to note when delinquencies have been remedied.
3. Consider whether you should fix certain problems. There may be negative information on your credit report that you want to fix. For example, you might want to pay an old collections account. However, you should think carefully before fixing certain problems.
Negative information must fall off your credit report after a certain amount of time. For example, an account in collections should fall off after seven years. If the account is six years old, you might want to wait and let it fall off rather than pay it off.
If you need help considering what to do, then you should consult with an attorney who can advise you.
4. Fix errors. You can correct errors by contacting each CRA online or by writing a letter. To protect yourself, you should probably do both. Mail your letter certified mail, return receipt requested.
The Federal Trade Commission has a sample letter you can use: https://www.consumer.ftc.gov/articles/0384-sample-letter-disputing-errors-your-credit-report.
See Dispute Credit Report Errors for more information on how to fix errors.
You might find the perfect investment property, but before you can buy it you need to obtain financing. Many people will go to a bank and ask for a conventional loan with a repayment period of 25-30 years. Before doing so, however, you should analyze your credit history to check that you are a good credit risk. You have more options than simply relying on a conventional loan. For example, you could cash out the equity in your home or seek owner financing of the investment property.
Method 1 Obtaining a Conventional Loan.
1. Pull together a down payment. You can’t rely on mortgage insurance to cover your investment property. Accordingly, you will need a sizeable down payment, around 20-25%.
2. Consider a neighborhood bank. Smaller banks might be more flexible about lending to you if you don’t have a large down payment or if your credit score isn’t perfect. Local banks also may have a stronger interest in lending for local investment, so they are a good option.
You might not know anything about smaller lenders, so you should do as much research as possible. Ask people that you know whether they have ever done business with the bank.
You can also check online. Look for reviews.
3. Gather necessary paperwork. Before approaching a lender, you should pull together required paperwork. Doing so ahead of time will speed up the process. Get the following.
two months of bank statements, prior two months’ statements for investment accounts and retirement accounts, last two pay stubs.
information about self-employed income, such as last two year’s tax returns or business financial statements, driver’s license.
Social Security card, papers related to bankruptcy, divorce, or separation (if applicable).
4. Work with a mortgage broker. A mortgage broker will apply for loans on your behalf with many different lenders and will compare the rates. The broker can also try to negotiate better terms for you. Using a mortgage broker is a good idea if you are too busy to comparison shop by going to many different lenders.
Mortgage brokers don’t work for free. You typically will pay about 1% of the loan amount. For example, if you borrow $250,000, then you can expect to pay around $2,500 to the mortgage broker.
You can ask other investors or a real estate agent for a referral to a broker. Before hiring, make sure that you interview the person and ask how much experience they have and what services they offer.
5. Compare loans. If you don’t want to work with a mortgage broker, then you will need to educate yourself about the basics of home financing. You might be an experienced pro who has borrowed before. However, if you haven’t, then remember to consider the following when comparing loans.
Interest rates. An interest rate is a percent of the loan amount that you pay as a privilege for borrowing the money. Interest rates can be fixed for the entire length of the loan or fixed for only a portion of the loan term.
Discount points. For some loans, you can pay points, which will lower your interest rate.
Loan term. This is the length of the loan. A shorter loan will cost more each month, but you will pay it off sooner and with less interest.
Origination charge. This amount of money covers document preparation, fees, and the costs of underwriting the loan.
6. Seek pre-approval. You should try to get pre-approved for a loan before searching for properties. Make sure to request the pre-approval in writing because sellers might want to see that you are pre-approved.
7. Don’t forget other team members. Purchasing investment property requires the expertise of many different professionals. You should begin assembling your team early—even before you get financing. You will probably need the help of the following people.
An accountant who can help you understand investment tax strategies.
A realtor who can help you sign an appropriate real estate contract.
An attorney who can help you protect your assets, for example by forming a limited liability company to hold the property.
An insurance agent.
Method 2 Using Other Finance Options.
1. Use the equity in your home. You might be able to use the equity in your current home to purchase an investment property. Generally, you can borrow around 80% of your home’s value. There are different ways you can tap the equity in your home, such as the following.
You could get a Home Equity Line of Credit (HELOC). A lender will approve you for a specific amount of credit, and you use your current home as collateral for the loan. The credit is available for a certain amount of time. At the end of this draw period, you must have paid back the loan.
You might also get a cash-out refinance. The lender will pay you the difference between the mortgage and the home’s value, but is usually limited to 80-90% of the home’s value. For example, if you have $20,000 remaining on your mortgage, but your home is valued at $220,000, then $200,000 could be available. You could get 80-90% of $200,000 ($160,000-180,000). This option usually has a lower interest rate than a HELOC.
Both a HELOC and a cash-out refinance put your home at risk if you can’t make repayments. For this reason, you should think carefully before tapping the equity in your home to finance investments.
2. Obtain a fix-and-flip loan. You might be able to get this type of loan if you want to purchase a property in order to renovate and then quickly sell. The loan will be short-term and is secured by the property. Fix-and-flip loans have high interest rates, so you need to renovate and sell quickly.
You might find it easier to qualify for a fix-and-flip loan compared to a conventional loan. However, lenders will still look at your credit history and income.
The lender will also want to know the estimated value after repair, which can impact whether they extend you a loan and the terms.
3. Research peer-to-peer lending sites. Peer-to-peer lending connects investors with lenders who are willing to lend. Two of the more well-known peer-to-peer lending sites are Prosper and LendingClub.
Peer-to-peer lenders will require that you complete an application. They look at your credit score and credit history. They may also have minimum credit scores in order to qualify.
You might not be able to get a large personal loan through peer-to-peer lending. However, small businesses can typically borrow more, so if you create an LLC then you might be able to borrow up to $100,000.
4. Find a business partner. You might not be able to secure a loan on your own, in which case you will need to consider other options. One option is to find a business partner who you can invest with.
You will want to screen any potential business partner, just as a bank would screen you. If you are counting on the partner to help pay for the loan, then you will need to check their credit history and employment.
You also need to consider how you will hold the investment property. For example, it might be best to create an LLC and to both be owners of the LLC. The LLC will then hold title to the investment property.
5. Consider owner financing. With owner financing, the owner lends you the money that you use to buy the property. Sometimes the owner will lend only a portion of the price, which you then supplement with a conventional loan. You should analyze the pros and cons of owner financing.
A benefit of owner financing is that an owner might be willing to lend if you don’t have perfect credit or a huge down payment available. You and the owner can work out loan terms that are acceptable to both of you.
Typically, the seller’s loan will be for a short period of time (such as five years). At the end of the term, you are obligated to pay off the loan with a “balloon payment.” This usually means you need to get a conventional loan to make this balloon payment. You should analyze your credit to see if you can qualify for a conventional loan in the near future.
See Owner Finance a Home for more information.
Method 3 Analyzing Your Credit Score.
1. Obtain a free copy of your credit report. Your credit score will have the largest impact on your ability to get a loan, so you should obtain a copy of your credit report.[18] You are entitled to one free credit report each year from the three national Credit Reporting Agencies (CRAs). You shouldn’t contact the CRAs individually. Instead, you can get your free copy from all three using one of the following methods.
Complete the Annual Credit Report Request Form, which is available here: https://www.consumer.ftc.gov/articles/pdf-0093-annual-report-request-form.pdf. Once completed, submit the form to Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281.
2. Find errors on your credit report. You should closely look at you credit reports to find any errors that might lower your credit score. If your score is below 740, then you will probably have to pay more to borrow. For this reason, you should do whatever you can to increase the score. Look for the following errors.
credit information from an ex-spouse, credit information from someone with a similar name, address, Social Security Number, etc.
incorrect payment status (e.g., stating you are late when you aren’t), a delinquent account reported more than once.
old information that should have fallen off your credit report, an account inaccurately identified as closed by the lender.
failure to note when delinquencies have been remedied.
3. Consider whether you should fix certain problems. There may be negative information on your credit report that you want to fix. For example, you might want to pay an old collections account. However, you should think carefully before fixing certain problems.
Negative information must fall off your credit report after a certain amount of time. For example, an account in collections should fall off after seven years. If the account is six years old, you might want to wait and let it fall off rather than pay it off.
If you need help considering what to do, then you should consult with an attorney who can advise you.
4. Fix errors. You can correct errors by contacting each CRA online or by writing a letter. To protect yourself, you should probably do both. Mail your letter certified mail, return receipt requested.
The Federal Trade Commission has a sample letter you can use: https://www.consumer.ftc.gov/articles/0384-sample-letter-disputing-errors-your-credit-report.
See Dispute Credit Report Errors for more information on how to fix errors.
Working people depend on having an income to live. You need to pay for housing, food, health care and many other things. Nevertheless, there may come a time when you want to be able to leave your job. The most common reasons are either retirement or a temporary leave to change jobs or careers. Whatever your reason for wanting to leave work, you will need to make financial plans. You will need to set aside some savings and make changes to your spending. Your mortgage and insurance costs will be an important part of the picture as well. With adequate planning, you can make it happen.
Method 1 Setting a Target.
1. Choose a date. Some people may decide at the start of their career that they want to work to age 50, or 55, or some other number. If you would like to make this a goal, you need to set your target and then work toward it. Claiming to have a goal means nothing unless you take steps to get there, but your first step is to decide what you want.
2. Identify an event. Your target to leave your present job may be some event, such as reaching a particular level of expertise or the day your supervisor leaves. Some of these targeting events may be under your control, and some may not. The less certain the event, the more prepared you will need to be.
For example, you may have decided that you want to leave your present company if they ever sell out or merge with some other company. Since you cannot control something like this and may not know when it is coming, you should try to have some alternative source of employment at least in mind for when the time comes.
In the event of a maternity leave, you may not know for years exactly when it is coming, but then in the final nine months (or so) you will know almost exactly. You can plan in general to have some savings set aside, and then when you get pregnant you can begin making some specific last-minute preparations.
Sometimes, the "event" that triggers a temporary leave might be a long-term illness, either yours or someone you need to care for. This can come with almost no advance warning. You need to plan for the general contingency and make some emergency preparations.
3. Plan a savings target. This is probably the most controllable concept. You can sit down with a financial planner and decide how much money you would need to have in savings to allow yourself and your family to survive adequately without your income. Then work toward setting aside that amount of money. As time goes by and interest rates fluctuate, you may need to adjust your plans accordingly. However, setting the target and doing the work up front will help you be as prepared as you can be.
If your target is to retire early, financial experts recommend that your savings target should be about 25 times your annual salary. You will then be able to withdraw money at the rate of about 4% per year.
If you target is to be able to leave work temporarily to look for a new job or another reason, then your target will be whatever amount you need to meet your expenses for that time. For example, the average job search is approximately four to six months, so you should plan to have savings to cover your living costs for that long.
Method 2 Reaching Your Target.
1. Work with a financial adviser. If you want to plan for leaving your job, you should enlist the help of a qualified financial adviser. Someone with expertise in investing can help you decide how much you need to save and can help you find the best ways to invest. If you want some help with finding a qualified financial adviser, read Hire a Financial Advisor or Select a Financial Advisor.
2. Invest your savings carefully. Working with your financial adviser, you will want to do more than just place your earnings in a bank account. Simple savings accounts earn very low interest. You will do better to invest in bonds, stocks or other securities, in accordance with your adviser’s opinions.
Investing works best when you begin as early as possible. Your best ally when saving is time. Your interest compounds more effectively when you begin early.
If your focus is to be able to take a temporary leave at some time, then you may need to have your savings in a readily accessible account. Long-term IRA savings are good for retirement planning, but you may need to be able to withdraw money sooner. Work with your adviser to find the best investment or savings plans for your needs.
If you want to plan for a lengthy, temporary leave, such as for a maternity or family illness, you will want to have savings in some readily accessible account. A short-term bond or money market may be the best bet, or even a simple savings account that you earmark for such an emergency.
3. Cut your expenses as much as possible. Many people live their lives from month to month and use a great deal of their income. If you manage a budget this way, you will do fine from month to month, but you will greatly delay your savings plan. If your goal is to be able to leave work, you should begin by cutting expenses as much as possible.
To begin cutting expenses, start by listing them all. Then review how you spend your money over a one- to three-month period and identify the expenses that you believe you can live without. Perhaps you can reduce the number of times that you go out to dinner. Maybe you can cut some entertainment expenses.
Manage your utilities. Try to reduce some of your monthly expenses by reducing utility usage in your home. Manage the heat, turn off lights, and do what you can to save water. These sound like small steps, but over time they can all add up.
Cutting expenses is a powerful financial tool for any job leave, whether permanent/retirement or a temporary leave for illness, maternity or some other reason. You need to consider the absence from work as an overall change in your lifestyle.
4. Plan to spend some on your new job search. Part of setting your target, if you are anticipating leaving your current job, should be to have some savings available to spend on a search for a new one. You will need money for correspondence, printing resumes, travel, parking, and possibly one or two new interview suits. You should anticipate these costs, estimate the amount of money that you will need, and set this aside as part of your target savings.
Method 3 Handling Your Mortgage.
1. Recognize the importance of your mortgage. For most people, housing payments make up the largest expenses they have. If you are paying rent, rather than owning your residence, those monthly payments are effectively doing nothing for you. If possible, purchase a property and get a mortgage. In this way, your monthly payments will be building equity for you. At the end of your mortgage, you will own the property outright in your own name.
2. Aim for your target date. As much as possible, try to align your mortgage to your target retirement date. That is, if you are relatively young and just starting out, then you may want to get a 30 year mortgage to last the duration of your career. However, if you can afford the monthly payments of a shorter mortgage, you will be setting aside money toward your equity at a faster rate.
3. Refinance when possible. When mortgage interest rates go down, you should try to refinance. By refinancing, you will get a lower interest rate and reduce your monthly payments. You may also take that opportunity to refinance into a shorter term. For example, if you started out with a 30 year mortgage, you may be able to refinance to a 20-year or even 10-year mortgage, for roughly the same (or even lower) monthly payment amount. More of the money, that way, will be going to pay down the principal loan.
4. Downsize after retiring. When you do leave your job, whether for permanent retirement or as a temporary leave, you may want to consider changing your residence. Many retirees choose to move to a smaller house with a lower expenses and mortgage costs. You may also wish to move to a different part of the country with lower overall costs of living.
Method 4 Making Other Miscellaneous Arrrangements.
1. Investigate your employer's maternity leave benefits. Some employers will offer paid maternity leave for some period of time. Others may stick to the allotted unpaid leave that is required under the Family and Medical Leave Act, which allows up to 12 weeks of unpaid leave. However, many small employers are even exempt from this. You need to find out what policy your employer has, and use that information to help you determine what financial help you will need.
For a maternity leave, you can also investigate whether you can be covered under short term disability insurance. This could provide a portion of your salary during your leave. To investigate coverage, you should talk with your employer or human resources personnel, or your own insurance company.
2. Plan some alternative, temporary income. If you are out of work temporarily, either looking for a new job, on a maternity leave, caring for an ill family member or for some other reason, you may want to plan for some temporary work that you can do. Find something that gives you the flexibility that you need to go along with your leave, but still provides some income for you and your family. For example.
Even with a new baby or an ill family member, you can probably find some time to tutor a few students a week or teach music lessons (if you have that talent).
You might be able to do some freelance writing or editing.
3. Transfer your company-based savings plans. If you participated in an employer-based savings or retirement plan, you should transfer that plan when you leave. Your financial adviser may be able to help you set up a personal IRA, or you might talk to an investments adviser at your bank.
4. Collect any payout benefits. If your company allowed you to accrue vacation time or sick time, you might be able to cash that in and collect an additional payment in accordance with your contract. In some cases, this can be a valuable payoff amount.
In some cases, you may be able to collect a partial cash payout for unused sick or vacation days to provide some cash for a temporary emergency leave, such as a family illness or bereavement leave. Even if such a benefit is not standard, you may want to talk with your employer and come up with some creative possibilities.
If you are not aware whether or not you have such a benefit, contact your company’s human resources department and ask.
5. Maximize stock options, if any. If you were granted the option to purchase stock in the company, and you have not exercised that option to its fullest potential, you should do so before leaving. These options can often be very valuable and will not be available to you later.
Depending on your contract, you may have a set period of time to purchase such options upon your separation from the company.
6. Plan for health insurance. One of the primary benefits of employment is having health insurance. When you plan to leave, whether for permanent retirement or a temporary leave for a job change, you will need to make plans for some replacement health insurance. You may wish to investigate the following options:
If you are under age 26, your parents may be able to add you to their health plan.
If you participated in the insurance plan through your employer, you may be eligible through COBRA to continue on that plan for up to 3 years by making your own monthly payments.
Your spouse or partner may be able to add you to their health plan.
Working people depend on having an income to live. You need to pay for housing, food, health care and many other things. Nevertheless, there may come a time when you want to be able to leave your job. The most common reasons are either retirement or a temporary leave to change jobs or careers. Whatever your reason for wanting to leave work, you will need to make financial plans. You will need to set aside some savings and make changes to your spending. Your mortgage and insurance costs will be an important part of the picture as well. With adequate planning, you can make it happen.
Method 1 Setting a Target.
1. Choose a date. Some people may decide at the start of their career that they want to work to age 50, or 55, or some other number. If you would like to make this a goal, you need to set your target and then work toward it. Claiming to have a goal means nothing unless you take steps to get there, but your first step is to decide what you want.
2. Identify an event. Your target to leave your present job may be some event, such as reaching a particular level of expertise or the day your supervisor leaves. Some of these targeting events may be under your control, and some may not. The less certain the event, the more prepared you will need to be.
For example, you may have decided that you want to leave your present company if they ever sell out or merge with some other company. Since you cannot control something like this and may not know when it is coming, you should try to have some alternative source of employment at least in mind for when the time comes.
In the event of a maternity leave, you may not know for years exactly when it is coming, but then in the final nine months (or so) you will know almost exactly. You can plan in general to have some savings set aside, and then when you get pregnant you can begin making some specific last-minute preparations.
Sometimes, the "event" that triggers a temporary leave might be a long-term illness, either yours or someone you need to care for. This can come with almost no advance warning. You need to plan for the general contingency and make some emergency preparations.
3. Plan a savings target. This is probably the most controllable concept. You can sit down with a financial planner and decide how much money you would need to have in savings to allow yourself and your family to survive adequately without your income. Then work toward setting aside that amount of money. As time goes by and interest rates fluctuate, you may need to adjust your plans accordingly. However, setting the target and doing the work up front will help you be as prepared as you can be.
If your target is to retire early, financial experts recommend that your savings target should be about 25 times your annual salary. You will then be able to withdraw money at the rate of about 4% per year.
If you target is to be able to leave work temporarily to look for a new job or another reason, then your target will be whatever amount you need to meet your expenses for that time. For example, the average job search is approximately four to six months, so you should plan to have savings to cover your living costs for that long.
Method 2 Reaching Your Target.
1. Work with a financial adviser. If you want to plan for leaving your job, you should enlist the help of a qualified financial adviser. Someone with expertise in investing can help you decide how much you need to save and can help you find the best ways to invest. If you want some help with finding a qualified financial adviser, read Hire a Financial Advisor or Select a Financial Advisor.
2. Invest your savings carefully. Working with your financial adviser, you will want to do more than just place your earnings in a bank account. Simple savings accounts earn very low interest. You will do better to invest in bonds, stocks or other securities, in accordance with your adviser’s opinions.
Investing works best when you begin as early as possible. Your best ally when saving is time. Your interest compounds more effectively when you begin early.
If your focus is to be able to take a temporary leave at some time, then you may need to have your savings in a readily accessible account. Long-term IRA savings are good for retirement planning, but you may need to be able to withdraw money sooner. Work with your adviser to find the best investment or savings plans for your needs.
If you want to plan for a lengthy, temporary leave, such as for a maternity or family illness, you will want to have savings in some readily accessible account. A short-term bond or money market may be the best bet, or even a simple savings account that you earmark for such an emergency.
3. Cut your expenses as much as possible. Many people live their lives from month to month and use a great deal of their income. If you manage a budget this way, you will do fine from month to month, but you will greatly delay your savings plan. If your goal is to be able to leave work, you should begin by cutting expenses as much as possible.
To begin cutting expenses, start by listing them all. Then review how you spend your money over a one- to three-month period and identify the expenses that you believe you can live without. Perhaps you can reduce the number of times that you go out to dinner. Maybe you can cut some entertainment expenses.
Manage your utilities. Try to reduce some of your monthly expenses by reducing utility usage in your home. Manage the heat, turn off lights, and do what you can to save water. These sound like small steps, but over time they can all add up.
Cutting expenses is a powerful financial tool for any job leave, whether permanent/retirement or a temporary leave for illness, maternity or some other reason. You need to consider the absence from work as an overall change in your lifestyle.
4. Plan to spend some on your new job search. Part of setting your target, if you are anticipating leaving your current job, should be to have some savings available to spend on a search for a new one. You will need money for correspondence, printing resumes, travel, parking, and possibly one or two new interview suits. You should anticipate these costs, estimate the amount of money that you will need, and set this aside as part of your target savings.
Method 3 Handling Your Mortgage.
1. Recognize the importance of your mortgage. For most people, housing payments make up the largest expenses they have. If you are paying rent, rather than owning your residence, those monthly payments are effectively doing nothing for you. If possible, purchase a property and get a mortgage. In this way, your monthly payments will be building equity for you. At the end of your mortgage, you will own the property outright in your own name.
2. Aim for your target date. As much as possible, try to align your mortgage to your target retirement date. That is, if you are relatively young and just starting out, then you may want to get a 30 year mortgage to last the duration of your career. However, if you can afford the monthly payments of a shorter mortgage, you will be setting aside money toward your equity at a faster rate.
3. Refinance when possible. When mortgage interest rates go down, you should try to refinance. By refinancing, you will get a lower interest rate and reduce your monthly payments. You may also take that opportunity to refinance into a shorter term. For example, if you started out with a 30 year mortgage, you may be able to refinance to a 20-year or even 10-year mortgage, for roughly the same (or even lower) monthly payment amount. More of the money, that way, will be going to pay down the principal loan.
4. Downsize after retiring. When you do leave your job, whether for permanent retirement or as a temporary leave, you may want to consider changing your residence. Many retirees choose to move to a smaller house with a lower expenses and mortgage costs. You may also wish to move to a different part of the country with lower overall costs of living.
Method 4 Making Other Miscellaneous Arrrangements.
1. Investigate your employer's maternity leave benefits. Some employers will offer paid maternity leave for some period of time. Others may stick to the allotted unpaid leave that is required under the Family and Medical Leave Act, which allows up to 12 weeks of unpaid leave. However, many small employers are even exempt from this. You need to find out what policy your employer has, and use that information to help you determine what financial help you will need.
For a maternity leave, you can also investigate whether you can be covered under short term disability insurance. This could provide a portion of your salary during your leave. To investigate coverage, you should talk with your employer or human resources personnel, or your own insurance company.
2. Plan some alternative, temporary income. If you are out of work temporarily, either looking for a new job, on a maternity leave, caring for an ill family member or for some other reason, you may want to plan for some temporary work that you can do. Find something that gives you the flexibility that you need to go along with your leave, but still provides some income for you and your family. For example.
Even with a new baby or an ill family member, you can probably find some time to tutor a few students a week or teach music lessons (if you have that talent).
You might be able to do some freelance writing or editing.
3. Transfer your company-based savings plans. If you participated in an employer-based savings or retirement plan, you should transfer that plan when you leave. Your financial adviser may be able to help you set up a personal IRA, or you might talk to an investments adviser at your bank.
4. Collect any payout benefits. If your company allowed you to accrue vacation time or sick time, you might be able to cash that in and collect an additional payment in accordance with your contract. In some cases, this can be a valuable payoff amount.
In some cases, you may be able to collect a partial cash payout for unused sick or vacation days to provide some cash for a temporary emergency leave, such as a family illness or bereavement leave. Even if such a benefit is not standard, you may want to talk with your employer and come up with some creative possibilities.
If you are not aware whether or not you have such a benefit, contact your company’s human resources department and ask.
5. Maximize stock options, if any. If you were granted the option to purchase stock in the company, and you have not exercised that option to its fullest potential, you should do so before leaving. These options can often be very valuable and will not be available to you later.
Depending on your contract, you may have a set period of time to purchase such options upon your separation from the company.
6. Plan for health insurance. One of the primary benefits of employment is having health insurance. When you plan to leave, whether for permanent retirement or a temporary leave for a job change, you will need to make plans for some replacement health insurance. You may wish to investigate the following options:
If you are under age 26, your parents may be able to add you to their health plan.
If you participated in the insurance plan through your employer, you may be eligible through COBRA to continue on that plan for up to 3 years by making your own monthly payments.
Your spouse or partner may be able to add you to their health plan.
A franchise is a business for which a person is licensed by a large company to operate under its name. As a franchise licensee, you operate a business and, in some cases, a brick-and-mortar location. Even without a physical storefront, starting a franchise requires a fair amount of money. There are several ways to finance a franchise. In addition to using your savings and leveraging your existing assets, there are loans and grants available from many sources. You may need to utilize more than one of the following methods to raise enough capital to start your business.
Part 1 Arranging Financing with the Franchisor.
1. Find out what financing your franchisor offers. The place most franchise licensees will start looking for financing is with the franchisor company itself. Many offer loans through their own finance companies or third party financiers they have business relationships with. This will often cover a significant portion of your startup costs.
Franchisors may also have agreements already set up with companies that can lease you some of the equipment you need to get the franchise up and running.
Each franchise has it's own package in terms of what it will offer new franchise licensees. Check into what your company offers.
This information may be available online or in other documents provided with your franchise application, or you may need to request it.
2. Look into down-payment and collateral requirements. Franchisors will require you to demonstrate that you have some collateral that will allow them to recoup their money, should your franchise fail. Many also require that you put up a down-payment of money that you have NOT borrowed from other sources.
McDonalds, for example, typically requires new franchise licensees to pay 25% of the costs of a franchise out of pocket, in cash. This ensures that franchises only go to people who have the necessary resources to make payments.
3. Apply for financing. Complete the necessary forms to apply for financing from the franchisor. Again, these will vary based on the company. Information about how to apply for financing may be included in the Franchise Disclosure Statement, or you may need to request it from the company.
The Franchise Disclosure Statement is a document you will receive from the company if your franchise application is approved. It spells out in minute detail the specifics of the franchise agreement. It is mandated by the Federal Trade Commission that all franchisors provide this document to licensees.
Like any other loan application, you will be expected to provide information about your assets, financial history, and net worth.
Part 2 Securing Outside Financing.
1. Apply for a bank loan. Another option consider for financing your new franchise is a standard small business loan from a bank. Especially if you have a good credit rating and are opening a franchise with a positive reputation, banks may be willing to offer you some starting capital.
Typically bank loans of this sort will require you to put up some kind of collateral, such as your home or any stocks or bonds you might own. They will also often want you to pay for as much as 20% of the cost of starting the franchise from your own money, to be certain you are capable of covering major business costs.
These loans usually require you to have already established a relationship with a banker.
2. Apply for an SBA loan. If your bank won't provide you with a loan, you may be able to secure a loan through the US Small Business Administration. These loans are disbursed by banks and credit unions, but are guaranteed against default by the federal government.
SBA loan 7(a) is available to franchise licensees opening any business on the SBA's franchise registry.
You can borrow between a couple hundred thousand and a few million dollars through the SBA. These loans typically have a five-year maturity period, so they work well for startup costs, but not longer-term expenses.
The International Franchise Association provides a directory on their website of vendors that administer SBA loans. The process of applying for an SBA loan, however, is a highly complicated one. Thus, it is usually recommended that applicants secure assistance from an accountant. If you don't have an accountant, your franchisor may be able to suggest someone.
3. Apply for a finance company loan. A recent development in the world of franchise financing is the online loan portal. These are websites that match franchise licensees with private creditors.
Two of the biggest online loan portals are Boefly and Franchise America Finance.
Some franchisors have have relationships with these companies. Ask your franchisor if they subscribe to any of these website.
4. Find investors or business partners. Another option for financing is look for a business partner to share the cost (and profits) of your new franchise. Many franchise licensees also turn to friends or family to borrow money or ask them to invest in the business.
Several small loans from friends or family members, to whom you promise to pay some mutually agreeable interest rate or equity in the business, can go far to cover the costs of starting a new franchise.
Equity means that your investors will be entitled to a share of the profits from the business and have a certain measure of control over its operations (depending on your agreement with them).
However, equity does not have to be repaid (unlike a loan).
You can also advertise in the local press seeking an investor or business partner. However, advertising for investors can be tricky, due to securities laws regulating the solicitation of public investors. Hire a financial lawyer to make sure you are staying on the right side of the law.
Be sure to draw up a formal agreement about the terms of the investment (i.e. how much they are investing, what interest rate you will pay, and over what period you will pay back the loan). This is especially important if you have investors who you don't know well.
Obtaining investment in this way will require accepting investments under the Securities and Exchange Commission's (SEC) Regulation D and the creation of official offering documents that detail the investment in a specific format.
If you are using Regulation D, be sure to hire a financial attorney to guide you through the process. Otherwise, you open yourself up to financial and criminal penalties resulting from violations of SEC regulations.
Part 3 Using Your Own Assets.
1. Use savings and other assets. Most franchise licensees end up covering at least a portion of the startup costs from their own resources. An obvious place to start is with your own cash savings.
Don't go overboard on this. A good rule of thumb is not to invest more than 75 percent of your cash reserves. That way, if an unexpected expense comes up, you have some money to cover it.
2. Borrow against your home. Many people starting a new business will borrow money based on the value of their home to get the business started. Money borrowed on the value of your home is tax-free. There are two ways to do this.
You can get a line of credit based on the value of your home. This is known as a home equity line of credit (HELOC) and is best for when you are unsure of how much money you will need, as the line of credit structure allows you to borrow as needed.
You can take out a second mortgage on the house. This will provide you with a set amount of money that must be repaid as a regular mortgage would.
Be warned that with either of these options, if you find yourself unable to make payments on the money borrowed, you could lose your home.
3. Use your retirement fund. Another common approach to self-financing is to use funds in your retirement account.[16] IRAs and 401(k) plans can be withdrawn from to finance all or part of a franchise business. However, there may be significant fees and taxes involved, depending on the plan type.
If you withdraw these funds as cash, you'll lose a significant chunk in taxes. There may be ways to avoid doing so, but you should seek professional legal and tax help when attempting them due to the complexity and possible negative consequences.
Taking funds out a traditional IRA or 401(k) before the age of 59.5 will result in a 10 percent penalty being assess on the withdrawal. This is in addition to the income taxes assessed on the withdrawal.
So, if you withdraw $100,000 and you are in the 25 percent marginal tax bracket, you would pay a total of 35 percent ($35,000) on your withdrawal, leaving you with only $65,000 for your business.
Withdrawals from a Roth IRA, however, are tax and penalty-free, provided they consist of contributions that have been in the account longer than five years.
Be warned, however, that if your new business fails, your retirement funds will be wiped out.
Part 4 Refinancing Your Franchise.
1.Decide when to refinance. Refinancing is taking on a new loan which pays off any old loans you already have. Most commonly, this is done to reduce interest payments, but could also be an opportunity to borrow additional funds and consolidate that loan with existing ones. You should consider refinancing if.
You can get a loan at a better interest rate.
You want to consolidate multiple loans into a single payment.
You want to change from and adjustable to fixed rate of interest, or vice versa.
You need more capital to update equipment, make improvements, or open an additional location.
2. Look into refinancing options. It is a good idea to frequently look for loans that will offer more favorable terms than the one(s) you already have. This can significantly reduce your interest payments and free up capital for other uses.
Once you've been in business for a while, you may become a more attractive customer to banks and other financiers. This is because over time, you demonstrate your ability to successfully run your franchise. This makes you a less risky investment. That, in turn, can lead to offers with better rates.
Check with your bank, and re-examine the option of an SBA loan, as this is often the least costly option for people who can get one.
3. Weigh the fees against the savings. Refinancing isn't free. There are usually fees, such as closing costs, involved in refinancing any loan.
There may be other penalties as well, based on the details of your old loan.
The question to ask is whether the savings outweigh the fees, time, and effort that go into refinancing. You may find that you can refinance and save a thousand dollars over the life of the loan. You'll need to decide if that's worth the time and effort. Your answer might be very different if you could save ten thousand dollars.
4. Update your business plan. Before applying for a new loan, update your business plan to reflect the current state of your business and your goals for the future. Your new business plan should include.
Strengths and weaknesses of your business.
Major milestones or accomplishments.
Expertise you have developed in running the franchise.
Goals for the next two to five years.
Two years of tax returns.
The payment schedule of your current loan.
5. Apply for a new a loan and pay off the old one. Fill out an application for the new loan. When you receive the funds, pay off the old loan.
Typically, the bank will handle the payoff for you. They will pay off your old loan, and billing will come from the new loan company from then on.
You may be able to refinance with a lender you already have loans from. This can save time and effort and sometimes mean less fees.
Tips.
Be sure to have any investment agreements reviewed by a legal professional prior to accepting money from investors, especially if they are people you don't know well.
Warnings.
It is not advisable to invest money set aside for specific important purposes (such as your children's college fund) in your franchise. As confident as you may be in its success, businesses fail every day. If that happens, there will be no way to recover your money.
Never use money from new investors to pay previous investors. Doing so could inadvertently turn your legitimate attempt to finance a franchise into an illegal investment scheme.
A franchise is a business for which a person is licensed by a large company to operate under its name. As a franchise licensee, you operate a business and, in some cases, a brick-and-mortar location. Even without a physical storefront, starting a franchise requires a fair amount of money. There are several ways to finance a franchise. In addition to using your savings and leveraging your existing assets, there are loans and grants available from many sources. You may need to utilize more than one of the following methods to raise enough capital to start your business.
Part 1 Arranging Financing with the Franchisor.
1. Find out what financing your franchisor offers. The place most franchise licensees will start looking for financing is with the franchisor company itself. Many offer loans through their own finance companies or third party financiers they have business relationships with. This will often cover a significant portion of your startup costs.
Franchisors may also have agreements already set up with companies that can lease you some of the equipment you need to get the franchise up and running.
Each franchise has it's own package in terms of what it will offer new franchise licensees. Check into what your company offers.
This information may be available online or in other documents provided with your franchise application, or you may need to request it.
2. Look into down-payment and collateral requirements. Franchisors will require you to demonstrate that you have some collateral that will allow them to recoup their money, should your franchise fail. Many also require that you put up a down-payment of money that you have NOT borrowed from other sources.
McDonalds, for example, typically requires new franchise licensees to pay 25% of the costs of a franchise out of pocket, in cash. This ensures that franchises only go to people who have the necessary resources to make payments.
3. Apply for financing. Complete the necessary forms to apply for financing from the franchisor. Again, these will vary based on the company. Information about how to apply for financing may be included in the Franchise Disclosure Statement, or you may need to request it from the company.
The Franchise Disclosure Statement is a document you will receive from the company if your franchise application is approved. It spells out in minute detail the specifics of the franchise agreement. It is mandated by the Federal Trade Commission that all franchisors provide this document to licensees.
Like any other loan application, you will be expected to provide information about your assets, financial history, and net worth.
Part 2 Securing Outside Financing.
1. Apply for a bank loan. Another option consider for financing your new franchise is a standard small business loan from a bank. Especially if you have a good credit rating and are opening a franchise with a positive reputation, banks may be willing to offer you some starting capital.
Typically bank loans of this sort will require you to put up some kind of collateral, such as your home or any stocks or bonds you might own. They will also often want you to pay for as much as 20% of the cost of starting the franchise from your own money, to be certain you are capable of covering major business costs.
These loans usually require you to have already established a relationship with a banker.
2. Apply for an SBA loan. If your bank won't provide you with a loan, you may be able to secure a loan through the US Small Business Administration. These loans are disbursed by banks and credit unions, but are guaranteed against default by the federal government.
SBA loan 7(a) is available to franchise licensees opening any business on the SBA's franchise registry.
You can borrow between a couple hundred thousand and a few million dollars through the SBA. These loans typically have a five-year maturity period, so they work well for startup costs, but not longer-term expenses.
The International Franchise Association provides a directory on their website of vendors that administer SBA loans. The process of applying for an SBA loan, however, is a highly complicated one. Thus, it is usually recommended that applicants secure assistance from an accountant. If you don't have an accountant, your franchisor may be able to suggest someone.
3. Apply for a finance company loan. A recent development in the world of franchise financing is the online loan portal. These are websites that match franchise licensees with private creditors.
Two of the biggest online loan portals are Boefly and Franchise America Finance.
Some franchisors have have relationships with these companies. Ask your franchisor if they subscribe to any of these website.
4. Find investors or business partners. Another option for financing is look for a business partner to share the cost (and profits) of your new franchise. Many franchise licensees also turn to friends or family to borrow money or ask them to invest in the business.
Several small loans from friends or family members, to whom you promise to pay some mutually agreeable interest rate or equity in the business, can go far to cover the costs of starting a new franchise.
Equity means that your investors will be entitled to a share of the profits from the business and have a certain measure of control over its operations (depending on your agreement with them).
However, equity does not have to be repaid (unlike a loan).
You can also advertise in the local press seeking an investor or business partner. However, advertising for investors can be tricky, due to securities laws regulating the solicitation of public investors. Hire a financial lawyer to make sure you are staying on the right side of the law.
Be sure to draw up a formal agreement about the terms of the investment (i.e. how much they are investing, what interest rate you will pay, and over what period you will pay back the loan). This is especially important if you have investors who you don't know well.
Obtaining investment in this way will require accepting investments under the Securities and Exchange Commission's (SEC) Regulation D and the creation of official offering documents that detail the investment in a specific format.
If you are using Regulation D, be sure to hire a financial attorney to guide you through the process. Otherwise, you open yourself up to financial and criminal penalties resulting from violations of SEC regulations.
Part 3 Using Your Own Assets.
1. Use savings and other assets. Most franchise licensees end up covering at least a portion of the startup costs from their own resources. An obvious place to start is with your own cash savings.
Don't go overboard on this. A good rule of thumb is not to invest more than 75 percent of your cash reserves. That way, if an unexpected expense comes up, you have some money to cover it.
2. Borrow against your home. Many people starting a new business will borrow money based on the value of their home to get the business started. Money borrowed on the value of your home is tax-free. There are two ways to do this.
You can get a line of credit based on the value of your home. This is known as a home equity line of credit (HELOC) and is best for when you are unsure of how much money you will need, as the line of credit structure allows you to borrow as needed.
You can take out a second mortgage on the house. This will provide you with a set amount of money that must be repaid as a regular mortgage would.
Be warned that with either of these options, if you find yourself unable to make payments on the money borrowed, you could lose your home.
3. Use your retirement fund. Another common approach to self-financing is to use funds in your retirement account.[16] IRAs and 401(k) plans can be withdrawn from to finance all or part of a franchise business. However, there may be significant fees and taxes involved, depending on the plan type.
If you withdraw these funds as cash, you'll lose a significant chunk in taxes. There may be ways to avoid doing so, but you should seek professional legal and tax help when attempting them due to the complexity and possible negative consequences.
Taking funds out a traditional IRA or 401(k) before the age of 59.5 will result in a 10 percent penalty being assess on the withdrawal. This is in addition to the income taxes assessed on the withdrawal.
So, if you withdraw $100,000 and you are in the 25 percent marginal tax bracket, you would pay a total of 35 percent ($35,000) on your withdrawal, leaving you with only $65,000 for your business.
Withdrawals from a Roth IRA, however, are tax and penalty-free, provided they consist of contributions that have been in the account longer than five years.
Be warned, however, that if your new business fails, your retirement funds will be wiped out.
Part 4 Refinancing Your Franchise.
1.Decide when to refinance. Refinancing is taking on a new loan which pays off any old loans you already have. Most commonly, this is done to reduce interest payments, but could also be an opportunity to borrow additional funds and consolidate that loan with existing ones. You should consider refinancing if.
You can get a loan at a better interest rate.
You want to consolidate multiple loans into a single payment.
You want to change from and adjustable to fixed rate of interest, or vice versa.
You need more capital to update equipment, make improvements, or open an additional location.
2. Look into refinancing options. It is a good idea to frequently look for loans that will offer more favorable terms than the one(s) you already have. This can significantly reduce your interest payments and free up capital for other uses.
Once you've been in business for a while, you may become a more attractive customer to banks and other financiers. This is because over time, you demonstrate your ability to successfully run your franchise. This makes you a less risky investment. That, in turn, can lead to offers with better rates.
Check with your bank, and re-examine the option of an SBA loan, as this is often the least costly option for people who can get one.
3. Weigh the fees against the savings. Refinancing isn't free. There are usually fees, such as closing costs, involved in refinancing any loan.
There may be other penalties as well, based on the details of your old loan.
The question to ask is whether the savings outweigh the fees, time, and effort that go into refinancing. You may find that you can refinance and save a thousand dollars over the life of the loan. You'll need to decide if that's worth the time and effort. Your answer might be very different if you could save ten thousand dollars.
4. Update your business plan. Before applying for a new loan, update your business plan to reflect the current state of your business and your goals for the future. Your new business plan should include.
Strengths and weaknesses of your business.
Major milestones or accomplishments.
Expertise you have developed in running the franchise.
Goals for the next two to five years.
Two years of tax returns.
The payment schedule of your current loan.
5. Apply for a new a loan and pay off the old one. Fill out an application for the new loan. When you receive the funds, pay off the old loan.
Typically, the bank will handle the payoff for you. They will pay off your old loan, and billing will come from the new loan company from then on.
You may be able to refinance with a lender you already have loans from. This can save time and effort and sometimes mean less fees.
Tips.
Be sure to have any investment agreements reviewed by a legal professional prior to accepting money from investors, especially if they are people you don't know well.
Warnings.
It is not advisable to invest money set aside for specific important purposes (such as your children's college fund) in your franchise. As confident as you may be in its success, businesses fail every day. If that happens, there will be no way to recover your money.
Never use money from new investors to pay previous investors. Doing so could inadvertently turn your legitimate attempt to finance a franchise into an illegal investment scheme.
