Since it has become difficult to get business loans from traditional sources many people have been looking for non traditional ways to finance a business. Some think their 401k or their IRA investments are never to be touched and others see it as being a good source to fund a business. If you might be thinking about using your 401k to finance a business as if it were a loan from the bank, with interest payments, this can be a great source of financing for a business. There is of course the risk that the business fails and you will need to keep repaying this loan and interest.
You can a distribution to use your 401k to buy a business. This comes with penalties. There is a tax you must pay immediately for taking a distribution however there is not an obligation for repayment of the money. However any time you use this money to finance a new business you should be thinking about how to minimize your risk when possible. This should mean choosing a business that is not going to fail, it that is possible, or buying a business from someone who has established it with a great clients base.
It is important to know how risk tolerant you are before you think about using your 401k to buy a business. Even really successful transactions in business have a change of failure. You should always take extra precautions to make sure that your dependants are financially secure both now and in the future. You can do this by buying term life insurance get help with the risky start up time. This is really good for people who have a mortgage and children.
You should also look at your current employment. If you are going to take a loan from your 401k and you have a job you might be required to pay it back in 60days from the time you leave the job. Therefore you should make sure that you talk to a lawyer who can read the fine print before you sign the loan.
You might decide that you do not have a high risk tolerance or maybe you have a dependant that doesn’t agree with this choice, at this point you might want to talk to a business broker. They can tell you of any alternatives to find low interest financing. The most common is seller assisted financing. This is a buyer’s market and it is likely that sellers will be very motivated to work on a financing plan. A broker can negotiate terms.