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Can I Use a 401K Loan To Fund a Business?

Reviewed by Ty Crandall

November 14, 2023


401K Loan Credit Suite

You can use a 401K loan to fund a business. But, just because you can doesn’t mean you should.  It appears to be a fabulous option.  Your payments will just be going back into your account, and any interest will be paid to yourself. In reality, it is a good idea, until you realize there is an even better way.  

Should You Take Out a 401K Loan For Business Purposes? 

When it comes to using a retirement plan to fund a business, a 401K loan isn’t the only option. Technically a distribution could work too, but that’s not wise. More about that later.  There is actually another option that many do not know about. 

Unlock the Mystery of the 401K for Working Capital Program

401K Business Funding Credit SuiteIt’s not so much of a mystery as it is widely unknown.  This Credit Suite program offers a flexible and powerful way for a new or existing business or franchise  to leverage assets that are in a 401(k) plan or IRA. These are assets which are tied up in stocks. 

It doesn’t take long either.  In as little as 3 weeks you can actually invest a portion of these funds into your own business. Then, you not only have more control over the performance of your retirement plan assets, but you also have the working capital you need.

This type of program even has the blessing of the IRS. In fact, they  have their own name for it. It’s called a Rollover for Business Startups (ROBS). 

Will it Cause More Tax Issues Than a 401K Loan? 

No it will not.  According to the IRS, a ROBS qualified plan is a separate entity. It has its own set of requirements. The plan technically owns the business, not the individual. That means some filing exceptions for individuals might not apply to the plan. That said, always check with a tax expert when it comes to tax matters.

Learn bank rating secrets with Credit Suite's free, sure-fire guide.

Do You Qualify for a ROBS? 

Surprisingly, this type of financing is pretty easy to get. You do not have to submit financials or have good credit to get approval. In fact, all the lender will ask for is a copy of your two most recent 401(k) statements.

If the plan has a value of more than $35,000,  you can get approval. This is true even if you have really bad personal credit. You can get however much of your 401(k) is “rollable.” Sometimes, you can secure a low-interest credit line or loan for 100% of your current 401(k) value.

The plan you use cannot be from a business where you currently work. It will have to be from previous employment. Also, you can’t still be contributing to it. 

Benefits of a ROBS

The benefits of this option are many.  First, you can get 24-hour pre approval. Also, you pay no penalties for the rollover. Plus, you pay no application fees.

You can get approval even with bad credit, 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!

How Does it Work? 

It sounds kind of crazy but it works. Credit Suite business credit experts will help every step of the way.  First, we’ll help you set up a 401(k) plan in your company.  Then, you’ll invest your 401(k) funds in it. Your business then has cash, but no debt. Despite how complicated it sounds, It’s all super easy and fast on your end. We handle the hard stuff.

Also, with our program, you will get more than just the financing.  You will work with a CPA that will help you roll over a non-contributing and qualifying account. By doing this, 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 the fund. You will get 5 years of management and consulting services for your business.

The Question of Terms

The cost is 1% and the term is 5 years. There is a $4995  lender fee.  Remember, this includes 5 years worth of management and consulting.

Learn bank rating secrets with Credit Suite's free, sure-fire guide.

Why Can’t I Just Take a Distribution to Fund My Business with My Retirement?

Unless you are 59 ½ years old, there is an early withdrawal penalty of 10%. If you think about it, you would be paying a lot to use your own money. Don’t do that.

ROBS vs. a 401K Loan?

First of all, not all plans allow for loans.  If your plan does, the IRS will only let you borrow up to 50%, up to $50,000, before you have to start paying taxes.

Also, you would be paying interest.  That isn’t terrible, as you are paying interest to yourself. However, you will be making monthly payments, whereas with the 401K Rollover for Working Capital, there is no payment.   

This is a unique program. It allows you to tap into your existing retirement account without penalties or taxable distributions. You also avoid loans, banks, or credit checks. There is no debt and no monthly payment. 

What if You Need More Than You Can Get with This Type of Financing? 

Whether you decide on a 401K loan or you go the ROBS route, you may find you still need more.  It’s not uncommon to need other funding options to bridge the gaps between how much is available from your 401(k) and how much you actually need. 

One great option that compliments 401K financing well is the Credit Line Hybrid. You can get up to $150,000 in unsecured business financing. Similar to a 401K loan and the 401K for Working Capital program, you do not have to turn in a lot of documents.  In fact, this is considered “no-doc” financing. 

You do need to have a 700 or above credit score. However, if you do not meet this or other requirements, you can take on a credit partner that does. Many business owners piggy back off the good credit of a friend or family member until they improve their own. 

What makes this an especially good compliment to 401K financing, is that it also reports to the business credit reporting agencies. This just speeds up the rate at which you build your business credit score

What frustrates you the most about how bank ratings decide if your business will get a loan? Check out how our guide can help.

Business Credit Score

Even though neither a 401K loan or the 401K for Working Capital Program require good credit, it’s important to understand this one thing. The 401(k) for Working Capital Program does help you build a strong business credit score.  It isn’t easy to find accounts that report your business credit report. 

Credit Suite works with business owners every day that are struggling with this.  Most account holders do not make it clear whether they do this or not.  We work with those that we know do, and this program is one of the easiest ways to get another account reporting. 

Do not underestimate this benefit of the 401(k) financing program and the Credit Line Hybrid.  It is something that should be considered when making a financing decision.  Your business credit report can make a difference in whether you are able to get funding from another source in the future. 

Funding a Business With a 401K Loan

If your retirement fund allows for loans, and you have enough available in your account, then the answer is yes. You absolutely can. However, there is another, better option, for using your retirement account to fund your business.  Contact Credit Suite today to get started.

About the author 

Faith Stewart

Faith has a BBA with a major in Accounting, and a combined 20 years of experience in the fields of finance and account.

Before switching to writing, she spent 10 years working in various areas of small business and personal finance and accounting, including working as a public auditor at BKD, LLP, Financial Director at Central Arkansas Development Council, and Commercial Credit Analyst at Farmer's Bank and Trust.

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