Published By Janet Gershen-Siegel at September 17, 2017
Written by Janet Gershen-Siegel
Yes, it’s true! Smart business owners are using their 401k to fund their business. And the good news – no – GREAT news is – you can, too.
Got bad credit? Finding it difficult to fund your small business?
Venture capitalists want a big chunk of your business. Banks want collateral which you may or may not have. Other lenders might want you to have a better FICO score than you have. Or they might want you to be able to prove a history of payments.
If your business is brand new, then by definition, you could not possibly have any payment history.
Business funding doesn’t have to be hard to find. Some of it might be sitting in your lap right now.
One of your biggest personal assets could very well be your retirement funds. This includes your 401k accounts. You can use some types of personal collateral that you might have now. And this includes borrowing 100% of what’s in your 401k. You can even do this as a startup.
Even if you don’t have these types of assets now, you may very well have a partner, a friend, or a family member who does. And that person may be interested in letting you leverage their asset in return for a piece of your business.
And this is usually for a far smaller piece than a venture capitalist would want. 401k financing is an example of a funding program which is commonly used by business partners.
You can use your existing 401k or IRA account as collateral for business financing. The idea is that, rather than investing in other businesses, you are using your IRA or 401k to invest in your own. This program actually uses IRS proven strategies.
So you will pay no tax penalties and you can still earn interest on your 401k. Plus you can pay low rates. These rates can often be less than 5%.
You can even close and fund in less than three weeks. And you can usually get up to 100% of what’s “rollable” (that is, what can be rolled over) within your 401k account.
For many small businesses, using a 401k as collateral will work. So this is particularly true if they do not yet have inventory or equipment. That’s because either of those could also be used as collateral.
This type of financing has rates of 1 – 5% and it typically closes quickly. These loans are available even if you have bad credit, because a 401k is a proven asset. So your credit score could be as low as 350 and it simply would not matter.
Use your existing 401k or IRA as collateral for business financing. This program uses IRS proven strategies. You will pay no tax penalties. And you still earn interest on your 401k. Low rates, often less than 5%. You can close and fund in less than three weeks. You can usually get up to 100% of what’s “rollable” within your 401k.
The business can get an approval for a loan equal to 100% of the value of the 401k. The idea is you are investing the 401k in your own business. So this is instead of buying stocks in other businesses. There are no tax ramifications! This is a great way that smart business owners are using their 401k to fund their business!
Asset-based financing means you will get to keep more of your business but still get the financing that you need.
Do you have a friend or a family member with these types of assets? Then you could talk to them about being about to use their 401k for business financing. Of course your friend or family member will want some sort of compensation for this. And rightly so!
A common practice is to essentially buy the rights to use their 401k for financing. Do this as in exchange for a piece of your business.
The best part about this is that such guarantors generally won’t want as much of your business as, say, venture capitalists ever would.
Unsecured business credit lines are another resource. Use your assets as collateral. These can be personal assets like a 401k. Or business assets like equipment owned outright. Get 0% business credit cards with stated income. No financials will be required.
You can get up to $150,000. You will need to have a credit score of 700+.
Unsecured business financing can be the solution you need. These will report to the business CRAs, not the personal CRAs. You don’t need proof of cash flow or collateral. You don’t need to fulfill a time in business requirement.
With unsecured business financing, you only pay on what you owe, not like a loan. You can often get a 0% introductory rate. So this is usually for 6 – 18 months. These are ideal for startups, and for high risk industries.
With UBF, the lending source works on your behalf to get credit cards for you. Nearly always, their tactics to get you credit result in much more than you could get on your own. This is because they are going for multiple cards for you. Often they can get 5x what you could without them.
Generally, you will get five to eight cards with unsecured business financing. The lender can also get you low introductory rates, typically 0% for 6 – 18 months. You pay normal rates afterwards, usually 5 – 21% APR with 20 – 25% APR for cash advances.
They also get you the best cards for points, meaning you get the best rewards.
With UBF, you get credit with no security, assets, or collateral. The lender has no collateral to collect in case of default. They don’t look at or care about your cash flow either, all that matters is your personal credit. With a 650, you’ll only get personal cards.
But with a 680 credit score, you get both business and personal cards.
Note: you need quality credit with no derogatory reporting. This means:
You can use a guarantor or credit partner to up the numbers. Often these people want a piece of your business in trade for their help. Consider the creditors’ perspective. They want to know you’ll pay them back.
Most sources charge 9 – 12% success-based fees. Only pay the fee off what you secure. Pay an average of 10% on the amount borrowed. All lenders on all loan programs charge fees; you easily pay 5%+ even on an SBA loan.
This program, like most others including SBA, “roll-in” your fee, so you don’t pay up front.
They will be looking at the Balance/ Limit ratios on your existing revolving accounts. So the lower the ratio, the higher the approval amount will be. A 30% ratio is required. This looks at overall percentage, and individual percentage on each account.
Credit inquiries are a big factor tying into approval. So more than six inquires in six months is too much.
Don’t think your 401k is big enough, or maybe you think you don’t want to use it? That’s okay.
Got stocks and bonds? They’re another way to come up with collateral.
You can use your outstanding account receivables for financing. You can get as much as 80% of your receivables advanced to you ongoing in less than 24 hours. The remainder of the AR is released once the invoice is paid in full.
Closing takes two weeks or less and factor rates are as low as 1.33%. But your receivables should be with the government or another business.
So if you have purchase orders as well as accounts receivable, you can get financing to have those filled so you won’t need the cash to do so. Both of these are great options to get you money instead of you using your cash flow to do so.
You can also use your existing inventory as collateral for business financing. You’ll need inventory valued at $500,000 or more. You can get approved for a line of credit for 50% of your inventory value. Rates are usually 5 – 15% depending on your type of inventory.
And you can get funding within three weeks or less.
If you are an investor looking to buy and flip properties, and you have money, experience, and average credit you can get financing. You can get financing against commercial real estate. Also, you can get book of business financing if you’re an insurance agent.
Retain more of what your hard work has made. Do so by using your own retirement money now to fund your small business. Smart business owners are using their 401k to fund their business – and you can, too!