Ask any business owner what it is like to get a loan from a bank today and you’ll quickly find out that unless you are willing to give your right arm and left leg, it might be difficult to get the bank to part ways with their funds. Unless you have significant collateral to put up for the bank, most banks don’t want to engage in any type of conversation about loaning you money. Even if you have a substantial amount of work experience related to the kind of business you are beginning, unless you are purchasing hard equipment or other types of assets, the bank doesn’t want to lend you money to fund your salary for an initial start up venture. Now that you are considering leaving your job to pursue your dreams as a business owner, are there other creative ways to get capital if the bank won’t lend you money?
If you leave your job and have a 401(k) plan there are strategies out there in the market place called BORSA (Business Owners Retirement Savings Account) or ROBS (Rollovers As Business Start Ups) which can facilitate using your 401(k) plan to start up your business. Essentially the cash from your 401(k) can be used to purchase ‘stock’ from the employer in this new company. The funds can be used to purchase stock from an existing business, a startup company, franchise, or to handle other expenses. It is HIGHLY recommended that you sit down with a company or tax specialist that has expertise in this field if you go down this route with your 401(k) plan. Due to ERISA and IRS regulations, you can have a severe problem if the plan is not set up completely accurate at its inception. Companies like Guidant Financial and DRDA are some of the more popular companies that can facilitate these transactions and more intimately know the laws about how to self-direct your 401(k) in these manners.
Make sure you spend time asking about the up front fees which can be steep to get the plan initially set up and what the cost of ongoing maintenance will be on the plan to ensure you have enough money in your 401(k) plan to execute the transaction. I would recommend only going this route if you have a minimum balance of $100,000 or more in your 401(k) plan. People who choose to self-direct their IRA in hard real estate, or in ventures such as a BORSA, often underestimate how quickly their capital can dissipate. You should still use a quality business plan, very conservative pro form projections, and think about how you will still work with a bank for additional capital should the business need an infusion in future years. If the business fails, you could be facing other tax implications and additional risk so be sure to ask the appropriate questions about what happens if you need to close doors or have a business dispute.
Your dream may not be to toast up bread and ask what toppings your clients want on the sub you are making them, but with the dearth of capital loans being made by banks today it could be a smart money move to look at using your 401(k) to start the business that will help your financial future. I would exhaust all other options before you consider going through this complex route, but it is a possibility to use these funds to start a new business.
Visit oXYGenFinancial.net to request a consultation on how to make smart money moves for your future.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc – The Leaders in Gen X & Y Financial Advice and Services
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