Careers, employment and financial management have changed drastically since we shifted from the industrial age to the financial age. Gone are the days when you could expect your employer to take care of you when you retire or for your retirement benefits to suffice for life after work. In this post, we discuss how you can put existing funds to work for you in a new start up business.
Gaining Control of Your Future
Everyone is looking for more ways to have more control over their financial future. One attractive way you can ensure steady cashflow and have more control over your financial destiny is by starting a business or joining a franchise. In particular, a security industry franchise start up can offer the freedom and financial security that entrepreneurs are looking for.
One of the first challenges you'll be faced with in this endeavor is deciding how you will fund your start up. Below, we explain a funding strategy that is growing in popularity with business owners: a plan to access 401k funds to begin a security start up.
As many entrepreneurs will tell you, raising capital to start a business is not easy. If you are interested in starting a security company, you should research several options for financing the investment. Benefits like steering the business yourself and creating recurring revenue streams make this industry attractive, but some initial capital is necessary.
While you may opt to use loans or remortgage your house, it means you have to pay interest and put your assets on the line. The different types of loans you may qualify for have different advantages and disadvantages, including high interest rates. This is why more people are looking into various ways to use 401k funds to start their businesses.
However, you must take care to comply with various regulations to use these 401k funds legally.
Business Financing Options
There are different ways to access 401k funds, including loans and withdrawals, which may apply various penalties, taxes and/or rules for the distribution. If you take a loan from an existing 401k for capital, you can finance the business with funds from your own retirement plan. This money is paid back to your plan, allowing you to access the funds and pay it back to yourself.
It’s always smart to consult your financial adviser and/or corporate lawyer to ensure you don’t break any laws in your bid to use current 401k funds and the best way to go about it.
The process described below, however, may be an attractive alternative for investing funds you own in your new business.
Penalty-Free Option to Access 401k Funds for Business
Given that you can incur financial costs and even legal trouble if done incorrectly, it is advised that you follow due process when you access your 401k funds for business capital.
The technique described below, known as the ROBS or "rollover as business startup" method, is a great way for a sophisticated entrepreneurs and investors to raise capital for their business. You enjoy capital gains, reduce overhead costs by not having to pay interest and use your money to make higher yields. Although this carries some risk, it also reduces other types of risk, like loss of assets.
Guidant Financial, a financial services company, recommends following this process:
1) Establish a C Corporation
Establish your new business as a C corporation, eligible to begin a 401k plan for the new business. You must work in the business and not use it to generate passive income.
2) Create a 401k Plan for the Corporation
Once the C Corporation has been established, a new 401k plan is started. Employees should be able to invest a portion of their pay in the company 401k plan.
3) Move your Existing 401k Funds to the New Corporation’s Plan
To use your original 401k funds for capital, move your existing plan to the corporation’s newly created 401k plan. This will enable you to use the plan to finance your business.
4) Buy Shares in Your Business
You can now treat your business as an asset and access 401k funds to finance it. Once you have invested the funds, the 401k plan is a shareholder and the money can be used like any other capital.
Pros and Cons
You'll have to weigh the pros and cons of this decision to be sure it makes sense for you. On the upside, you won't pay high interest rates to utilize your 401k funds and you won't be required to answer to investors, friends or family about the business operations and success. On the downside, this is your money, originally planned for your retirement years. If your business fails, you may have a hard time recovering financially for retirement.
Understand all Your Options
Keep in mind that you will need the help of a financial manager to ensure you are meeting and following all the IRS rules that apply to this option. You'll need the third party involved on an ongoing basis to help with regular reports, investment strategy and offering the plan within your company to employees.
As you consider you options for business financing, be sure to position your start up in a way that you aren't incurring high penalties from borrowing or paying high interest rates as you get the business going. Understand all your financing options, so you can focus on the work you love and on growing your new venture. Our helpful e-book below can give you a roadmap for franchise success as you plan your strategy.
Image credit: GotCredit