Senior Entrepreneurs: Options for Financing Your New Business

Over 50 and thinking of starting a business? You’re in good company. Approximately 7.4 million Americans over the age of 50 work for themselves. And according to the AARP, one in six baby boomers working for someone else hopes to be self-employed in the future.

Senior entrepreneurs have many advantages. Starting a business later in life brings with it a wealth of business experience, aptitude for what it takes to compete and succeed and self-awareness that youth doesn’t always possess.

But with the average cost of starting a business hovering around the $30,000 mark, how can seniors finance their new ventures? Should you tap into your retirement savings, borrow against your 401k or apply for a loan?

Here are some considerations and options to bear in mind as you set about financing your new business venture:

Pursuing Your Dream of Self-Employment Needn’t Cost Much

Don’t be put off by the average cost of starting a business mentioned above; not all small businesses need huge amounts of financing to get off the ground. Home-based businesses can get started for around $1,000, which can be funded with a credit card. Home-based franchises are another option, and costs as low as $2,000 to buy into some.

Lean business practices, such as buying surplus and using independent contractors instead of hiring employees, can also help keep your costs low. If your investments aren’t going to help you generate revenue, don’t spend the cash!

Consider a Government-Backed Business Loan

Many seniors are wary of seeking out business loans, often concluding that lenders won’t finance businesses that get started later in life. This is where government-backed business loans can help. With lower fees and a guarantee to banks and lenders that a portion of the loan will be repaid if the business owner defaults on the loan, these loan programs encourage the lender to take a greater risk than it would have otherwise.

Government loans support billions in lending to small business owners, so talk to your local bank or financial institution about government loan programs they may offer.

Borrowing Against or Tapping into Your Retirement Savings – The Right Way

Should you tap into your retirement savings account to finance your business? Entrepreneurs are risk-takers, and even though the risks are high, using your own retirement money can give you an increased degree of flexibility and control over your business investment decisions than dealing with third-party sources of capital.

Each situation is different, so make sure you seek advice before you make a decision. Here are three options for using your retirement plan to fund your business:

1. Borrow Against Your 401(k) – Instead of withdrawing funds from your 401(k), you could borrow from your retirement account in the form of a personal loan. You can typically borrow up to 50 percent of your funds or $50,000, whichever is less. Repayment plans require that you repay your entire loan to your 401(k) within five years on a quarterly payment schedule. You’ll also need to pay interest on the loan, usually around 1 percent, which goes back into your own 401(k). Before you borrow against your 401(k), you will need to do a few things:
• Incorporate your business to reduce your personal liability.
• Buy all of the stock in your business with the loan from your plan.
• Roll your remaining 401(k) assets into a new plan managed by your incorporated business.

Be sure to talk to your accountant and your existing 401(k) administrator and get the right professional advice before pursuing on this option.

2. Tap into Your 401(k)/IRA – Tax law does allow you to tap into your retirement savings account without penalty, if you follow the rules—which can get complicated. To do this, you will need to structure your business as a C Corporation. This entity will then issue all of its stock and transfer it to a new 401(k) profit-sharing plan in exchange for the cash in the plan. Consult a tax attorney or accountant to handle incorporating and setting up the new retirement plan.
3. Withdraw Directly from Your 401(k) – This should be your last option. Anything you withdraw is subject to regular income taxes and could draw a hefty tax penalty, depending on your age (10 percent for those 59½ years old or younger).

Get Advice

While financial intuitions and your retirement plan administrator can help steer you through some of the options discussed above, it’s also worth getting objective advice from small business assistance resources in your community.

A good place to start is to team up with a business mentor from SCORE, a nationwide nonprofit association dedicated to educating entrepreneurs and helping small businesses start, grow and succeed. Their services are free.

Local Small Business Development Centers and Women’s Business Centers also provide counseling on available financing options.