Welcome to Ask an Expert Business Series with Misty Lambrecht, the owner of Webfoot Marketing and Design, sharing valuable insights based on her extensive 15 years of experience in business startups and advising in Lincoln County. I recently heard about a client who wanted to start a business and needed some cash. They had a great plan and a good idea. They were leaving a long-term government job where they had some retirement savings, and they also had equity in their home. They were advised to either cash in their retirement savings or get a home equity loan to finance their new business.
I believe the idea of cashing in their 401(k) retirement to start a business was an
absolutely horrible idea. Paying the taxes and penalties with no guarantee of being able
to replace the money in a short period of time to avoid those penalties is not advisable.
Putting a mortgage on their house may not necessarily be a horrible idea, but it's
probably not the best idea either. Yes, home equity loans may have lower interest but
you are also risking a lot.
I believe that when you're starting to look for financing for a business, the first step is to
come up with a very clear business plan and explore how you can start your business
on a smaller scale and grow as your business grows. Instead of buying a $70,000 food
truck, consider starting with something like a pop-up tent, a grill, and a cooler, and work
at farmers'; markets. Instead of purchasing a building, you can rent for a while to see if
your business is feasible and if the location suits you. You might even start your business from your home. Remember, Phil Knight started Nike out of the trunk of his car, so starting small doesn't mean you would not eventually grow big.
There are other ways to secure small amounts of capital without incurring interest. I
highly recommend exploring Kiva loans. I have personally been a lender for Kiva loans,
which is a form of crowdfunding. It's an excellent way to access $8,000 to $12,000 for
your startup without interest. There are other loan options with higher interest rates that
you should carefully consider before jumping into huge debt In the end, it's important to have available cash or resources later on, rather than using them all upfront for a business you haven't tested and do not know if it will be successful. Ask yourself how you can start small and determine the minimum amount of money you need to get your business off the ground. Test it out and see how things work before committing to a financial situation that may be difficult to recover from.