Creating a debt to access equity for the down payment on your SMB

An article about how you come up with a downpayment to buy a SMB...

I received an email from one of you the other day…

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Hi David,

I understand that a banker will want to see me put some of my own money into a deal.

You describe this as equity and also my own cash.

While I do have a positive net-worth, I don’t have a bunch of money in a bank account, it’s the equity in my house.

Can this be used as a down-payment on a business?

Thanks

J.O.

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Great question and it brings us back to a fundamental topic that I don’t think I’ve discussed in a long time.

Sometimes, we need to make a debt to access equity.

A lot of people buy a business by taking advantage of the equity in their homes.

For example, you have a house worth $500,000 and a mortgage of $250,000.

Let’s say a banker says they’ll lend up to 80% of the house’s value in a refinancing.

This would be $400,000.

So, if you refinanced the house, you’d pay off the mortgage and end up with $150,000 in your hands to use as a down-payment on a business.

The bank is not going to consider this $150,000 to be ‘debt’ because you have the house to cover the new mortgage off if any trouble were to come up.

So, even though you got the $150,000 via creating a new mortgage debt, the asset (house) makes this equity.

This is in stark contrast to a credit card.

If you borrowed $50,000 from a credit card and wanted to use this as a down payment on a business, the bank would not allow it.

They would say this is debt because you owe it back and there is no asset to cover it off in the case of a crisis.

Real estate is often used because it’s a place where people are ‘forced to save’ as each mortgage payment is usually a mix of principal and interest.

So, as real estate prices rise and you pay down the debt, over time you get more and more equity.

BUT- house prices can go down.

It’s happened before.

There are other tools that you can also use if you want to build this kind of long-term equity asset.

I’ve seen many people use equity in an insurance policy for example.

It works the same way.

You pay annual premiums for a life insurance policy that you own.

This is called whole life or permanent insurance.

The policy’s cash value grows over time, and you can borrow against it.

Because the policy will pay out one day upon your passing, any loans you’ve taken are guaranteed to be repaid at that time.

This means you can always get access to equity without having to ‘qualify’ as you might for a mortgage.

If you have an income and are planning to buy a business in the future, you may want to add this tool to your equity options.

I’ve had several interviews with Mark Willis who is an expert and designing these polices with the intention of maximizing the investment returns and growth of cash value.

There have been 6 interviews so far as well as a short and informative webinar we did on the topic.

You can see them all and sign up for a free consultation about it over at https://www.NewBankingSolution.com

Cheers

David C Barnett

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