Using Retirement Funds For Your Business

Imaging financing your business without all the hassles of dealing with a bank or having to worry about such items as:

• Interest Rates,
• Monthly Payments,
• Collateral,
• Credit Scores and Credit Histories,
• Debt ratios,
• etc, etc, etc.

Well you might already have the ability to do just that, by investing in yourself using your retirement funds.

These funds are yours and you should be able to use them how you best see fit.

In fact, in 1974, the IRS agreed - you should be able to manage and control your own retirement accounts.

Invest In Yourself:

You can take your retirement funds (which is already your money) and invest those funds in yourself - to purchase or expand your business.

Then, return twice or three times those funds in less than 5 years. Much better then waiting and hoping that the stock market will double or triple itself in that same time frame.

Plus, if you truly believe in your idea or business, but can't get outside financing any where else - this may be your last option.

The good news is that while this may be your last resort, it does not have to be the worst means of raising capital for your company.

In fact, the Employee Retirement Income Security Act of 1974 (otherwise known as ERISA) and based on the Internal Revenue Code (the IRS's code) has allowed large corporations to do just this for years. Many companies that offer retirement plans to their employees also have a way for those employees to invest their retirement funds in that same company. And, you can do the same (invest your retirement funds in your own company).

All the IRS states, since ERISA in 1974 put the responsibility of retirement plans in the hands of the employee (not the employer), that these plans are in compliance as long as they are properly designed and operated.

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Types of Retirement Accounts That Can Be Used:

The key factor in understanding which retirement accounts that can be used to invest in your business (be it a startup, franchise or existing business) is that the funds can be rolled over into your new business's retirement plan. If your funds are held by your employer or by a restrictive retirement plan at a financial service organization, you will need to terminate that relationship - by, either leaving that employer's service or moving your funds to a less restrictive environment.

Generally, the following types of retirement plans can be self-invested in your business:

• IRAs - Most commonly used.
• 401 (k) Plans - Second most commonly used.
• 403 (b) Plans
• 457 Plans (for governmental agencies)
• SEPs
• SIMPLE Plans
• Annuity Plans
• Defined Benefit Plans
• Profit-Sharing Plans
• Cash Balance Plans
• Money Purchase Plans
• Rollover Plans
• Employee Stock Ownership Plans

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How It Works:

The process is really simple based on the following steps:

1. Form a Business Structure: Here you set up a new corporation (C-Corp) as per the ERISA and IRS requirements. Typically, a Limited Liability Company, Partnership or S Corporation will not meet the required guidelines.
2. Have the new corporation adopt a company retirement plan that allows investment in the corporation.
3. Roll-over your current retirement plan(s) in to this new retirement plan. This can be done TAX-DEFFERED AND PENALTY FREE!
4. Lastly, direct that new retirement account to invest in the stock of the new business - providing your new corporation with the capital it needs to move forward - capitalizing its without debt or other restrictive measures (like equity holders).

The retirement plan will hold the company's stock on its balance sheet and can pay dividends to those shares (back into the plan) or buy those shares back at a later date at a much higher valuation.

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Benefits:

The major downside here is that should your business fail, you are out those funds (just like a bank or investor would be out had they invested in your business). So, there are risks - risk that your business will fail and that you will lose those retirement funds.

However, do know that you can mitigate those risks by doing proper research and conducting a feasibility study before investing in your business. By ensuring that once invested, you do all that you can to manage your business so that it does succeed. And, not giving up or giving in when things get tough (as they will). Know that if you find out down the road that your business model is not working, don't just quit and walk away, find out what went wrong, make changes (even large changes if needed) and take off in a new direction. Many of the most famous / successful entrepreneurs did not succeed in their first attempt. But, persevered by understanding what did not work, making tweaks or changes and taking the business in a new, better - more profitable - direction.

In fact, research shows that those who invest their own retirement funds have a much lower rate of failure than other similar businesses. Why? This is their money and they are less likely to either walk away from the business or work extra hard to ensure that it does not fail.

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Costs:

There are always costs associated with business financing.

First, there are the costs of setting up the new corporation and its subsequent retirement account. This could be the cost of registering with both the IRS and your state's business corporation department.

Administrative fees for rolling over your retirement accounts into your new company.

Costs of attorneys for the issuance of those stocks to the retirement plan.

Costs associated with seeking an outside company to help you set this up, manage the plan and stay in compliance.

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Use of Funds:

Once your new corporation sells stock to your new retirement plan, you can essentially use those funds for nearly any legitimate investments in the business or to pay legitimate business expenses.

You can use the funds to:

• Buy a business or purchase a franchise,
• Recapitalize your existing business with out taking on debt,
• Provide the equity for the down payment necessary if you are securing an SBA loan,
• Purchase inventory,
• Pay employees,
• Invest in real estate, tax liens, personal loans, or private businesses,
• And so many more legitimate business needs.

One restriction may be an investment of those funds to make other capital investments.

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Seeking Outside Help:

Many companies have been set up to help you through the entire transaction and beyond. In fact, many of these companies will do most of the work for you - for a fee of course. They offer pre-approved plans as well as the knowledge to void common pitfalls.

Further, these firms and plans can help you stay up-to-date and in compliance with the rules and regulations that govern all these qualified retirement plans.

But, if you have better things to do with your business and don't want to have to stop and work through the steps to set this up, then the potential time savings may very well outweigh the fees.

Most business owners, when seeking business capital, state that they only need someone to take a chance on them - to believe in their idea and ability. Well, here is your chance to believe in yourself and realize your own business dream.

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