Financial Roulette
Worth The Risk?
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All this is why an idea as cockamamie, ill-advised and downright
dangerous as taking money from your IRA, in certain circumstances,
isn't such a bad idea after all. Although people will call you
crazy if you even think of taking money out of an IRA to
fund a business, there can be a gaping hole in the logic behind
those people's complaints. In McCain's case, the lapse in
the logic is that her IRA, funded with $1,000, is just about the
only asset she has. She can scratch her head wondering where to get
$1,000, or she can roll the dice, get on with life and perhaps make
a lot more money that she ever could playing it safe. Here's another reason for McCain to tap her IRA:
Entrepreneurs who don't put themselves in some form of jeopardy
to get their businesses off the ground often preclude the
participation of other investors. Banks, family members and angel
investors don't like to be the only ones at risk in the deal.
The thinking goes, "If you're not willing to risk it, why
should I?" Entrepreneurs who do take these kinds of risks
often find that financial partners, would-be or otherwise, are much
more receptive to financing proposals. McCain, though not totally comfortable with the idea of drawing
on her IRA, is doing it anyway. "I see it as a way to
accelerate the process," she says. "I can plod along, or
I can put my money where my mouth is." And, in truth, while
raiding one's own pension fund simply can't work in a lot
of deals-i.e., never use it to fund biotech research and
development-it works beautifully for the rapid inventory turnover
business McCain has chosen. Content Continues Below
Once McCain finally gets her hands on her money, she can use it
to get $1,000 worth of inventory. If all goes well, this $1,000 in
wholesale goods will generate $2,000 in retail sales. As a result,
she only has to sell half her inventory in 60 days and get it back
into her IRA before she'll suffer any penalties. In fact, the
wiser entrepreneurs might suggest that putting herself under the
gun like that is the best thing that McCain can do to jump-start
her business. The real beauty of the plan is that if she sells out
her inventory and makes $1,000, she can finance her next purchase
of inventory with profits rather than her nest egg. In short, by
taking on some risk, McCain gets her assets to work for her.
Originally published in the June 2000 issue of Entrepreneur Magazine
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