William R. Seagraves, President & Founder, CatchFire Funding
No matter where you are in your entrepreneurial journey, it’s always smart to have a game plan. Living in the moment is a great mantra, just not if you’re a business owner. In order to get the results you desire, preparation is key – and that includes determining how to finance your business. The way you fund your business will have a significant effect on its eventual success so you definitely want to do your research and think deeply about all the options.
There are many funding options that exist, but all of them fall under two major categories: accessing your own money or borrowing from other people. My book, Be Your Best Boss: Reinvent Yourself from Employee to Entrepreneur delves into the various choices you have for both categories, helping you weigh the pros and cons of each. Although it may not always be possible, ideally, you want to avoid taking a loan so you don’t start out under a pile of debt. Utilizing a self-directed 401(k) is a great alternative to relying on a third party for financial assistance. Not many people even know this option exists, so let me explain.
A self-directed 401(k) involves rolling over all or a portion of your retirement money (from an existing 401(k), IRA or other eligible retirement account) into a new 401(k) plan, then investing those funds into your new business. When you use this strategy to invest in your business, you are truly investing pretax dollars. You’re not borrowing funds. You’re not withdrawing them. Think of it this way: you are telling your retirement plan to invest in the stock of the company you believe will be the best investment for your future: your company. Your business gets the money from the sale of its stock and has the cash necessary to start or expand.
A self-directed 401(k) can be an entrepreneur’s best friend. The benefits of utilizing this option include:
The ability to approve yourself. Say goodbye to the stress and embarrassment of begging your banker for a loan. The only approval you need for a self-directed 401(k) is your own.
No debt, taxes or penalties. With no interest to pay and no time schedule to repay the retirement funds, your business can experience improved cash flow. What makes it more enjoyable is the fact that you won’t have the headache of accrued debt, taxation or other penalties.
Keeping paperwork to a minimum. Setting up a self-directed 401(k) plan requires significantly less paperwork than a loan application – those can be very long and complicated. A business plan and the killing of lots of trees are not required to get self-directed 401(k) funding.
You can get funding fast. On average, individuals receive their money from the rollover of their current retirement plan and the purchase of their company stock in about three weeks. If you’re looking to be effective and efficient, the self-directed 401(k) delivers.
You can choose how to use it. You can use the money for salaries, equipment, inventory purchases, or any other legitimate business expenses – including a down payment on another loan. Being your own boss means being able to make your own decisions and a self-directed 401(k) allows you to do that from the very beginning.
Your retirement fund will thank you. A self-directed 401(k) can help you continue to save for retirement by allowing you to contribute a portion of your entrepreneurial salary back to the plan. It also allows for normal employer matching and profit-sharing contributions. The taxes on all of these contributions are deferred until the funds are withdrawn during retirement.
The bottom line is that you don’t know what you don’t know. In terms of financing your business venture, there are more options than you realize. What’s important is that you talk to reliable resources, do your homework and arm yourself with the information necessary to make a smart, savvy decision. Welcome to the world of entrepreneurship – it’s an exciting journey.
About the Author
William R. (Bill) Seagraves, president and founder of CatchFire Funding, of Parker, CO, is the author of Be Your Best Boss: Reinvent Yourself From Employee to Entrepreneur (TarcherPerigee, on sale February 2016). Himself a serial entrepreneur, Bill coaches mid-career Americans on the best route to successful entrepreneurship. Learn more at yourbestboss.com.
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