Hey guys Sean Mory here. Thanks for joining us for another session of LenCred Credit Geeks Q&A. Joined Dustin Weitzell our number 1 Advisor in small business funding for the year 2015. Today we answering a question Dustin from Shelly out of Colorado. Shelly asks, ” How to get a small business loans from 401k?” Can I use my 401k to finance my startup small business? I think it is an awesome question because most people that are still in their jobs are currently looking to get out but carefully. They know if they stopped or quit their job there are not going to have any income. So when they take out a payment to start their business they may start out in debt and worry about how they are going to pay that back. Rolling over their 401k could be a good option but there are somethings they need to know.
I know for a fact that there is a company we work with exclusively that is awesome and we will refer you there. You want to make sure all your legal stuff is in there, tax’s are taken care of, but most importantly there are basic rules. You can not currently work at that company any more if you are going to use your 401k. There are certain things that you want to make sure you have in line before you use your 401k.
More importantly to answer Shelly’s question on a more basic sense. You do not have to draw your 401k out in all cash. You can work with a company like you referenced and it is called a 401k rollover. You roll that 401k or a portion of it, if you are doing less then thirty five grand it is not really worth your time financially, you can take that and roll it over into your business and it becomes a line of credit that is accessible for the business. You do that tax exempt if you do it the RIGHT WAY!
What is important do that with somebody as opposed to drawing that straight cash, not only is it the financial advantage, but more importantly that take yearly upkeep. If you are not managing your books and if you are like me I am no accountant, I am a financial advisor, I could not manage taxes and things like that. You need to make sure you work with someone who knows how to do that as opposed to potentially jeopardizing yourself and getting rid of your nest egg. 401k is probably not your only option.
You want it to be not your only option, we always preach to our clients if you have that as an option that is great to have as a backup. Lets go and attempt to get maybe some more creative ways to maybe get you some unsecured money so you do not have to use that. That way if you fall a little short you still have the 401k but maybe not have to use all of your retirement. You know when people are talking about HELOC’s and putting their house up to try and fund their business, if you believe in what you are doing that is great, but know that if your wife or husband may have an issue if the business goes down. It is about knowing your options and trying some other things first, knowing that you always have the 401k as a back up.
I think that is really the most important point there and I will wrap up with this for Shelly. The simple fact is, this should be one of those many options that you invest in. Do not put all your eggs into one basket, is for a reason, they are all going to be in one if you only use your 401k. If that basket all of a sudden disappears. How are you going to run your company? In addition, there is not real business credit being established when you do it that way, same with personal loans. Going with other options, like unsecured business lines of credit, will give you a paper trail which will let banks access your risk and see how you pay money back.
Using your 401k will not help you with any of that. You will be going 6 to 9 months with revenue coming in but you still have to build business credit. That is also hoping that you pay back yourself on the 401k you drew from the beginning. Everyone wants to make money right out of the gate but we all know it can take up to two years before your company starts generating and reasonably healthy revenue. Also, you need time to learn your company. Learn you business, learn your revenue cycles, learn your debt schedule. There are a lot of risks that go in when you go straight for your cash. It is the easiest but not always the best option. Well Shelly I hope that answers your question, thank you Shelly, keep them coming Colorado and anywhere else. Ask away, visit us at www.lencred.com and we will be happy to answer everything we can. Thank you.