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Get 401k Business Financing Options for Your Business

Published By Faith Stewart at June 23rd, 2022

Get 401k Business Financing Options for Your Business

After the decision to start your own business comes the question of how to fund it. There are a lot of small business financing choices, but many do not work so well for new businesses and startups. Thankfully, 401k business financing can be a way to get around this problem for newer small businesses.

Business Startups Have The Hardest Time Getting Funding

Those looking to start a business have no way to show traditional banks or other financial institutions that their business can ever turn a profit. It’s even worse when a small business owner has bad personal credit.

How can potential business owners fund small businesses if they can’t prove to a lender that they’ll pay the loan back?

What About An SBA Loan?

The Small Business Administration offers guarantees for loans through a traditional financial institution. Their mission is to make funding more accessible to small business owners. The problem is, due to the government backing, even though the requirements for credit and revenue may be more flexible, the process is actually harder.

The SBA Loan Application Process Is not Walk in the Park

There is a lot more that goes into getting small business finance from the Small Business Administration than many realize. There is more paperwork and red tape. That said, the government guarantee does allow local banks to be more flexible with credit score requirements. The score will still need to be good, just not as good as with a traditional loan. Here are a couple of the most common funding options they offer.

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7(a) Business Loans

This option offers federally funded term loans up to $5 million. The funds can be used for expansion, purchasing equipment, working capital and more.

The minimum credit score to qualify for 7(a) loans is 680.  There is also a down payment requirement of at least 10% for the purchase of a business, commercial real estate, or equipment.

Finally, the company must be in business for 2 years. For an applicant who wants to start a business, business experience equivalent to two years fulfills this requirement. 

504 Business Loans 

Loans from this program are available up to $5 million. They can be used to buy machinery, facilities, or land. They are generally used for expansion.

Private sector lenders or nonprofits process the loans and disburse funds. Honestly, this options works especially well for commercial real estate purchases.  

The terms for this type of loan range from 10 to 20 years.  However, actually getting the funds can take from 30 to 90 days. The minimum credit score is 680, and collateral is the asset the loan is financing.

There is a down payment requirement of 10% with this program also, which can increase to 15% for a new business. 

It also has two 2 years is business requirement, but equivalent experience of management if the business is a startup works here as well. 

Crowdfunding to Start a Business Could Work, But Probably Won’t

When you think of a way to fund a new business, you might consider crowdfunding. The main benefit is the potential to fund your business debt free. There are major drawbacks however, including not being a sure thing. 

Crowdfunding Works Better for Some Than Others

It works well for some businesses, but not for every business. In fact, most find that they need to supplement their crowdfunding money with some other form of funding.  It’s debt free cash, so it is definitely worth considering. Remember though, debt free isn’t the same as free.

How About Angel Investors or Venture Capital Money?

The issue with both is that a business owner is giving up equity in their own business. For a new business in a regular-style industry, venture capital is not going to be an option. VCs really just want to invest in a small business that is significantly changing the paradigm.

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Microloans Can Be a Good Option

Microloans can be good alternatives if you don’t need a lot of cash. You can even get these as SBA loans. But keep in mind: it’s not a lot of cash. So, even if you go after a microloan, you might still be looking at borrowing in order to make up a funding shortfall.

What About a Traditional Bank Loan?

Much like any financing option from the Small Business Administration, traditional bank loans have stricter requirements.

We may think of these loans first when we think about small business funding, but (for example) traditional lenders generally aren’t going to be interested in working with startups.

You can, however, use 401k business money to start a new business. You don’t necessarily need a small business loan.

What About Using Personal Savings?

Technically, you could do this. But using a 401 k to start a business works better. And it even follows IRS rules because the IRS wrote the rulebook.

Your Retirement Funds are Assets

If you have a 401k plan from previous employment, you can use those retirement assets for small business funding. It works when you want to start a business as well. Whether you have a traditional IRA or a ton of Roth IRAs from earlier employment, you can tap these funds to use retirement funs from a 401k for a pre-existing or new business.

Most Business Owners Don’t Think About This

Most people don’t even think about tapping their retirement account. They just jump to the small business loan options. There are different reasons for this.

For example, maybe they are concerned about interest rates if they start borrowing money from their retirement accounts. The truth is, that is not exactly how it works. If you do take a loan from your retirement plan, you will pay interest, but to yourself.

401k Business Financing is Different

401k business financing in the form of a Rollover for Working Capital program doesn’t even require debt. The ownership is just transferring from the owner to the plan.

Actually, this type of financing is pretty easy to get. There is no requirement to submit retirement plan financials or even to have good credit. Honestly, all the lender will ask for is a copy of your two most recent 401k statements.

Requirements

If the 401k has a value of more than $35,000,  you can get approval for this type of retirement plan funding. How much? You can get however much of your 401k is “rollable.”

Remember, this has to be a retirement plan from previous employment. You cannot still be working for that employer or still contributing to the retirement account.

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First, you can get 24-hour pre-approval. Furthermore, there are no penalties for the rollover. In addition, you pay no application fees.

Bad credit will not get in the way of using retirement funds in this way, and the time from application to funding is 3 weeks or less. A big bonus is this type of funding will report to the business credit reporting agencies. That means you build business credit!

Getting retirement funds this way from your 401k is better than a retirement plan loan. Why? Unless you are 59 ½ years old, there is an early withdrawal penalty of 10% for a loan. That means, you would be paying a lot to use your own retirement savings. That’s your money that you have already worked hard to earn. Don’t pay to use your retirement assets if you can help it.

The Difference Between 401k Business Financing in the Form of a Rollover for Working Capital and a 401k Loan

Not all plans allow for loans, but if yours does, the IRS will only let you borrow up to 50%, up to $50,000 of your retirement savings, before you have to start paying taxes.

As mentioned before, you would also be paying interest on your own retirement dollars. As you would be paying interest to yourself, that wouldn’t be the end of the world. It is, however, not always necessary.

You will be making monthly payments into your account, whereas with the 401k Rollover for Working Capital, there is no recurring payment.   

Unique Business Financing Option

The program is unique. You can tap into your existing retirement account without penalties or tax consequences. You also avoid loans and traditional banks, and a good credit score is not required. There is no debt and no monthly payment. 

With this financing option, you can get capital without the interest payments that would come with borrowing money directly from a traditional IRA or from Roth IRAs. Plus, if you’re under the age of 59 1/2, then you can use your IRA or 401k without having to pay any early withdrawal penalties.

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Credit Suite’s Retirement Account Financing Program

It starts with a discussion with a Credit Suite business credit expert. They will help every step of the way.  First, we’ll help you set up a 401k plan in your company.  Then, you’ll invest your 401k funds in it.

Your business then has cash, but no debt. Despite how complicated it sounds, it’s fast and easy to get 401k business financing on your end. The more intricate details of using your retirement plan to fund your business happens on our side.

With our program, you will also get more than just the 401k business financing. One of our specialists will help you roll over a non-contributing and qualifying account. Then, you can cash out half, or $50,000, whichever is lower.

If applicable, they will also structure a self-directing IRA for the rest of your retirement money in the fund. You will get 5 years of management and consulting services for your business.

The cost is 1% and the term is 5 years. There is a $1995  lender fee.  Remember, this includes 5 years worth of management and consulting. Ready to get started? Get in touch today!

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