The Collateral You Need to Close on Your Business Loan by ScoreSMB

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									The collateral you need to
close on your business loan
Businesses go through several stages of development and        Home equity loans
may require additional financing as they evolve, perhaps to    Home equity loans are a cost-effective alternative to other
increase inventory, retool equipment, expand the building,     types of loans because they typically offer competitive
or develop a new market. Over 40% of today’s business          interest rates. But you may not want to risk your family
owners look to banking institutions as a means to help         home to launch your business venture.
fund business development and growth. Yet, that same

percentage say they can’t get adequate financing,2 with        Small Business Administration (SBA) loans
outstanding business loans declining by 16% in 2010 as         SBA loan programs lend to small businesses unable to
compared to 2009.3                                             secure financing on reasonable terms through normal
                                                               lending channels. The loan programs are operated
So what are your financing options?
                                                               through private-sector lenders that provide loans which are,
Venture capital                                                in turn, guaranteed by the SBA – the Agency does not loan
Venture capitalists have stringent investment criteria and     money directly.
generally specialize in specific high-growth industries.
Accepting a venture capital investment represents the          Commercial bank loans
potential loss of independence for business owners because     Commercial loans are attractive because they don’t require
the investors often take an active role in the company.        entrepreneurs to turn over equity or company control.
                                                               However, financial lenders often find themselves reviewing
Credit cards                                                   many worthwhile loan applications only to decline them due
Credit cards are a quick way to gain access to cash. But as    to a lack of adequate collateral.
a long-term financing plan, they can be costly – credit card
interest rates typically run much higher than what you would
pay on a bank loan.                                            1
                                                                   MassMutual Business Owner Perspectives Study, 2011
                                                                   National Small Business Association, 2010 Mid-Year Economic Report
                                                                   Federal Financial Institutions Examination Council, 2010
Use life insurance to                                                                           What can life insurance  
collateralize your business loan.                                                               do for your business?
Most businesses need financing assistance from                                                  Life insurance can be a valuable financial tool for the life
lending institutions, especially when personal savings and                                      of your business, even after your loan obligations have
loans from family and friends begin to dry up. If adequate                                      been met and the policy is no longer required as collateral.
collateral is the only thing standing between you and                                           Consider purchasing permanent life insurance, as opposed
acquiring the loan you need to either grow your business or                                     to term life insurance, which may provide the following
simply keep it afloat, life insurance may be the solution.                                      benefits as part of an overall business planning strategy:
                                                                                                      • Key person protection: permanent life insurance
When life insurance is used to collateralize a business loan,
                                                                                                          provides a death benefit that can help recoup the
your lender retains “collateral assignment” of the policy
                                                                                                          cost of losing and replacing key employees if
while your loan is in effect. That means if the person insured
                                                                                                          they die, minimizing the impact of lost revenue that
by the policy (the business owner) dies while the loan is
                                                                                                          may result. Since the policy is permanent, it could
in effect, your lender has the right to claim a portion of the
                                                                                                          also be distributed to the employee as an additional
policy proceeds equal to the outstanding loan balance. Then
                                                                                                          perk at retirement.
any remaining proceeds are paid to your chosen beneficiary.
Once you’ve paid off your loan, you can remove the                                                    • Business succession planning: permanent

collateral assignment and your lender will no longer have                                                 life insurance is an ideal funding vehicle

any rights to the life insurance policy.                                                                  for buy-sell agreements; its death benefit ensures the
                                                                                                          surviving owners will have a source of liquidity to
                                                                                                          buy out a deceased owner’s share of the business.
      Look for a life insurance company that                                                          • Executive benefits: permanent life insurance can
      offers a program that expedites the                                                                 be a valuable fringe benefit to key executives by
      underwriting process on life insurance                                                              providing a death benefit that is paid to their loved
      used to collateralize a business loan –                                                             ones at death, and cash values that can be used to
      you don’t want to wait weeks and weeks for                                                          help supplement their retirement income.
      the policy you need to receive your loan.
                                                                                                      • Risk management: accumulated cash values from
                                                                                                          permanent life insurance can be accessed for a range
                                                                                                          of business cash flow requirements.

Insurance products issued by Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001 and its subsidiaries,
CM Life Insurance Company and MML Bay State Life Insurance Company, Enfield, CT 06082.

© 2011 Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001. All rights reserved. MassMutual Financial Group is a marketing name for
Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives.
SB10222  1011                                                                                                                                                         CRN201310-152558

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