Many would-be entrepreneurs have money tied up in retirement plans like IRAs or 401ks that could be used to fund their businesses. Many simply believe they can’t access these funds until they reach the age of 59.5 without being subject to a premature distribution penalty. That being said, there are a few ways that you can fund the small business that does not require you to be subject to a premature distribution penalty. You can even retain retirement account tax advantages.
Most new entrepreneurs consider debt financing (bank loans) to be their number one funding source since this is how most of us buy cars and homes. They soon discover that a more common source of funding for a start-up is equity financing (selling stock). New entrepreneurs rarely grasp the concept of smart money investors. They fear outside investors will impact the direction of the company in a negative way, and often avoid giving away equity and control to others at all costs.
As is always good financial advice when cash flow lags an investment, like when you are starting a new business, an equity infusion that gets paid out of profits works best. This is because a new business often can’t withstand fixed monthly debt payments, since their cash flow may be inconsistent or non-existent.
More mature businesses that have existing cash flow may take advantage of a debt infusion; one that pays principal and interest payments to the investor/lender from day one, and preserves equity and control.
In the next few posts, we will look at how a self-directed IRA can be used for equity investments and how borrowing short-term funds from your own 401k can provide you the necessary cash for your business needs.
Would your business benefit from having access to capital from your existing retirement account?
