How to Start or Grow a Business Debt-Free

One of the biggest hurdles facing entrepreneurs who want to start or grow a business is access to capital.  For most small business, taking on debt is the only option… if it even is an option.  Getting a bank loan for a new venture can be difficult.

Starting a business with a monthly debt payment is like trying to run while wearing a parachute.  It really slows you down.

What if you didn’t have to go that route, and could start your business by tapping the savings you hold in your retirement plan?  Would having sufficient cash and no debt improve the chance of success?

With a Business Funding IRA, you can self-fund your business.  Better still, you can access your retirement plan in this manner without taxes or penalties.

The Problems with Debt Funding

While debt has always been a common pathway to funding businesses, there are many downsides to this approach.

Most new businesses don’t have much access to credit.  That means that you as the business owner will probably need to pledge assets such as your home as security.  Starting or expanding a business is challenging enough.  Who wants to put the roof over their head at risk as well?

When conventional business loans are not an option, many business owners will take out a line of credit on their house or use personal credit cards that come with very high rates of interest.

Of course, the biggest problem with debt financing is the obligation make payments.  Any money going to repay a loan is money not available to grow the business or pay yourself and can really delay your business’ path to profitability.

Self-Funding your Business

With a Business Funding IRA you can use existing retirement savings to invest in yourself.  This strategy, often referred to as a Rollover as Business Startup (ROBS plan) allows you to capitalize your business using an IRA, 401(k) or other qualified employer plan without taxes or penalties.

Put simply, your retirement plan is becoming a shareholder of your business.

It takes a special configuration to achieve this goal, but this is not new.  The ROBS plan has been in use since the 1980’s and relies on long-standing provisions of the tax code surrounding retirement plans known as ERISA.

How A Business Funding IRA Works

A layered structure is required to allow your retirement funds to be an owner of your business without triggering a taxable event.

The operating business needs to be structured as a subchapter C Corporation.

The corporation will establish a qualified employer plan in either a 401(k) or profit-sharing format, depending on which best suits your needs.

You need to be an active, compensated employee of the business.  This allows you to rollover eligible retirement savings from an IRA, old 401(k) or other employer plans like a 403(b), 457, or pension.

Your retirement plan can now purchase shares of the parent corporation via an Employee Stock-Option Purchase (ESOP).

Your plan is now a shareholder of the business and the capital is available to the business for any legitimate business purpose.

With proper execution, there are no taxes or penalties associated with the process.

Advantages of Cash-Funded Businesses

When you fund your business venture using cash instead of debt, the likelihood of success is greater.

Your access to capital is not dependent on your credit score or how a bank views the prospects of your business plan.

You do not need to put your personal assets at risk as security for a loan.

Without monthly debt payments, your business can achieve profitability sooner.

You can still use debt such as SBA loans but will have better access to more favorable lending instruments with a well-capitalized business.

A Few Limitations

While the Business Funding IRA is a great option for many businesses, there are some cases where it may not be the right fit.

This strategy can only work with an active business providing a product or service.  You cannot build this structure around passive investments like rental property holdings.

A minimum of $100,000 in retirement funding is recommended.  The cost and structural complexity of this plan make it less than efficient for lower amounts.

In order to use this funding method, you must be actively engaged in and receiving a salary from the business.  You cannot use the ROBS strategy to help fund someone else’s business.

Invest in Yourself

If you are ready to pursue your dream of owning your own business, it makes sense to evaluate the Business Funding IRA.  You can invest in yourself and your vision.  After all, nobody is going to work harder to protect and grow your retirement plan investment than you.

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