Tight credit market turns small biz startups to their 401k for funding

Josh Smith

According to USA Today a recession is one of the best times to start a small business. Unfortunately, during a recession getting the funds to start a small business can prove difficult. Despite all the bailout dollars funneled to banks, even high net-worth individuals like BloggingStock's Sheldon Liber are having trouble securing financing! With the number of small business 71 loans down 30% last fiscal year, many individuals are funding their new business by raiding their 401k -- without taking any penalties!

Since the banks won't invest in them, these entrepreneurs are investing in themselves by utilizing a Retirement to Franchise Transfer plan. This plan allows them to withdraw money from their retirement account, such as a 401k or IRA, and invest it into a franchise business by purchasing stock in their franchise. From there it can be used as operating capital to cover the cost of doing business. Since the individual is purchasing stock in another company, investing, if you will, they incur no withdrawal penalties.

One company, Honest-1 Auto Care, has seen a sharp increase in the number of new franchise owners who turned to this method of financing over traditional small business loans. The auto repair chain has had 20% of its franchisees open their locations by using their 401k or other retirement plan as the funding source. This number will likely grow as Honest-1 Auto care plans to double the number of new locations in the coming year.

So is your retirement the best place to secure funds for your small business? It all depends how much you have saved up and what you can afford to lose. If you can invest in your small business using your retirement account without jeopardizing your golden years, or are young enough to recoup losses, then a Retirement to Franchise plan is a viable option. Just make sure you sit down with a financial planner before you start cashing out!