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Finance Your Franchise With Retirement Funds

April 23, 2010

There just isn't any financing available! That's the refrain everyone hears when discussing the biggest issue facing people who want to open a franchise in the current economic climate. The fact is that there is more truth to this statement than anyone in the government or banking business wants to admit, and it doesn't look like it is going to change anytime soon--at least as far as traditional loan sources are concerned. Standard bank loans, loans secured by the equity in one's home, SBA loans--these are all things of the past for most people.

So, what's an aspiring franchisee to do? Well, there is a ready solution that is being used more and more every day. It allows people to fund their business ownership dreams using the dollars they have built over time in their qualified retirement accounts--an untapped source of investment capital that most people haven't even thought of. Imagine funding your franchise without incurring any debt or having to pay interest. You can invest in yourself and retain a great deal of control over how successful that investment ultimately becomes.

You can access this money without incurring taxes or early withdrawal penalties, but you do have to be very careful to make sure you follow all the rules. There are two approaches to sourcing money from your existing 401(k) account; one is very simple and the other is more complicated.

The simple approach is to borrow the money. You can borrow up to 50 percent of your account or $50,000, whichever is less. You do have to set up a regular repayment plan (including paying interest on the outstanding loan balance at a reasonable level,) but getting this much money on this basis is usually very easy to accomplish. Contact your 401(k) plan administrator to learn the specific rules for your plan.

The more complicated approach involves using a transaction often referred to as a ROBS plan, which stands for Rollovers as Business Startups. This plan doesn't have the smaller limits and repayment requirements of a direct 401(k) loan, and it can also be used with an IRA account. In a nutshell, you set up your new company, establish a retirement plan within the company and then transfer your existing retirement dollars into this plan. You are then free to direct the investment of these dollars in whatever manner you consider to be the most effective--including an investment in your company's stock--by a process as easy as writing a check.

There are, of course, pros and cons to this approach to franchise funding. Some of the often quoted advantages include:

On the other side of the equation, there are some common concerns that you should be aware of, including:

Probably the single biggest advantage of using a retirement fund rollover to finance your franchise is that your investment decisions become yours and yours alone to make. You don't have to worry about someone else arbitrarily deciding that you should not be funded or putting restrictions on you that you don't think are fair or appropriate. If you decide that using your retirement accounts as a funding vehicle is the way for you to go, then it's just a matter of completing the paperwork. You are in complete control and can pursue your franchise ownership dreams--even in today's uncertain climate.