3 Common Ways to Finance Your Business

According to the Small Business Association (SBA), a lack of sufficient business capital is one of the biggest reasons small business fail today. And since large banks aren?t making as many loans to small business owners as they did before the crash of 2008, many would-be entrepreneurs turn to personal savings and friends and family?and still come up short. Luckily, there are still plenty of options. Here are 3 to consider:

Your Retirement Fund

According to the IRS, you can legally use your retirement savings to fund your new business, and under certain conditions, can do so tax and penalty free. You have a few options when using your retirement fund to buy or start a business.

  • 401(k) loan option. You can take up to $50,000, or half of your plan account, tax free. You will have to pay back the loan in quarterly payments over a five-year period with an interest rate of at least Prime.
  • The Rollover Business Startup Solution (ROBS) This method allows you to invest your retirement fund as an equity investment instead of using it as a loan. To access funds, you?ll need to set up a C-corporation that owns and operates your business, a 401(k) profit sharing plan sponsored by the business, and then roll your retirement funds into the 401(k) as an investment in the company?s stock. This method is considered controversial, but the IRS says it?s perfectly legal as long as you file the required annual reports and are open about the plan with employees.
  • IRA taxable deduction. If you?re over the age of 59 1/2 and have had a Roth IRA for at least 5 years, you can use the funds tax-free. If you?re under that age, you can still use your funds, but you?ll pay income tax on the money, as well as a 10 percent early distribution penalty.

You?ll find a comprehensive guide to using retirement funds on the SBA?s site.

Alternative Lenders

To fill the lending gap, scores of alternative lenders have sprung up that give small business owners multiple ways to get the funding they need. For example, peer to peer loans connect investors with small business owners and can be found at sites like Lending Club, Funding Circle, and Prosper. It?s important to keep in mind that you will likely pay a higher APR with alternative lenders, so if you have a relationship with a bank, you should try to get a loan there first.

Crowdfunding

Finally, you can take your funding request directly to individuals via crowdfunding sites like KickStarter. You?ll need to develop a solid business plan, put together a pitch and then spread the word about it. People who believe in your idea can choose to fund a portion of it in exchange for a customized reward.

Recent legislation has expanded this idea into something called equity crowdfunding. It allows individual investors who meet certain qualifications to invest in a business idea, effectively taking venture capitalism to the masses.

Banks may not be lending like they did before the crash, but that doesn?t mean you have to put your business on hold. Explore the lending options listed above and take a step toward opening your small business.

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