I consider myself a somewhat conservative entrepreneur( which may sound like an oxymoron). But the more I involve myself with the dilemma or how to finance business acquisitions, and are banks really loaning money to those that want to buy a business, and more specifically are banks making smaller loans to those that want to buy a small business (say $200,000 and lower) other means of financing should be considered. Ive always felt that banks do provide loans to those that can prove that they dont need it, and now that point is even stronger than in the past.
An SBA loan should be explored. They are available and the requirements for documents, security, and your financial well being can be both daunting and take considerable time. But one should explore this option.
Furthermore, when I initially hear of someone using a 401k to either fund a business or buy a business, I think penalties, fees, and shrinking nest egg. But like so much in the accounting and tax world the devil is in the detail.
Using your 401k money to buy a business can mean many different things.
Using your 401k can mean ….
1. Just taking money out of your 401k . – Just a Bad idea for so many different reasons
2. Taking a loan from your 401k– Most plans offer this options, there usually is amount restrictions, but you do pay interest back to your self.
3. Setting up a Self directed qualified plan(using a third party that specializes in this process) that allows you to purchase a franchise, or buy a business without distribution, taxes, penalties, or the use of loans.
Setting up a Self Directed Qualified plan involves the following steps:
- Form a C-Corporation
- Prepare the adoption documents for your New 401k plan for your new corporation
- Corporation Valuation
- Rollover- direct rollover from your 401k plan into your new account
- You as a Trustee will transfer money into your corporation checking account
Please note the above is a simplified summary, but does represent the spirit of the steps involved with setting up a Self directed plan to buy a business. There are cost to hiring a third party to administer setting up a self directed Plan to buy a business. It is their job and responsibility to guide you thru the specific process. There are also some additional annual reporting requirements to be done by your accountant. But if one wants to avoid a bank, or avoid borrowing from family or friends, or avoid borrowing against your home, then maybe using your 401k to set up a self directed plan to buy a business warrants further investigation.
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