Using Your Retirement Funds To Franchise a Business  

 In today’s economic climate, obtaining a standard bank loan can seem like an impossible task. Even with healthy businesses and solid collateral, most bank loans to new franchisees occur when a borrower has established relationships with a banker, has previous experience or is a prominent figure in the community. If that’s not you, consider this. 

With high interest rates, poor credit, and other barriers, small business owners are turning toward a new solution - retirement funds. Accounts like IRAs, 401(k)s, 403 (b)s, Keoghs, and SEPs may be used to help you invest in your own future. To be fair, this option is not for everyone. But if funding a tax franchise or other low cost franchise opportunity is your goal, this could be a great way to achieve it. 

One of the greatest benefits to tapping into retirement funds is the option of accessing the money without incurring penalties. If you can manage to replace those funds within 60 days, penalties can be avoided all together. By rolling your existing IRA or 401(k) funds into a new corporation’s 401(k), you can start a business or invest in franchise ownership without having to take out a loan, and without tax or distribution penalties - if done correctly. Financial advisors view retirement savings as the ultimate last-resort. But like many decisions, sometimes the benefits outweigh the risks. 

Early withdrawals from retirement accounts are generally subject to a minimum 10% penalty. To get around this, directing the funds to the company’s profit-sharing plan is an option for funding a new franchise opportunity. According to the Wall Street Journal's Small Business Guide, “You may want to consider setting up a C corporation that will own and operate the business. Then roll over money from your self-directed retirement account into that corporation’s profit-sharing plan and direct that those funds be invested into the franchised business.” The success of your business is vital, as failure could result in a total wipeout of your nest egg. Furthermore, there may be fees assessed for establishing this type of account. Should you choose to take this route, a tax advisor will be your BFF in the process. 

Making a small business opportunity a success are the dreams of many, and the rewards that come with it are priceless. Tough economic times shouldn’t mean a complete abandonment of pursuing entrepreneurial endeavors. By taking a mindful approach, while being cognizant of the pros and cons of your decision, making your vision a reality is just a phone call - and a bit of paperwork - away.