Leveraging your 401k to Fund your Business
Thursday, May 15, 2008 by Mike Chatas
Where to Find Money to Fund Your Company
Raising equity is one of the toughest tasks for any aspiring small business owner. Even with an SBA guaranty, banks still require small business owners to put some “skin” into the game by requiring them to come to the closing table with their own funds. This is commonly called an “equity injection”. The minimum equity injection required for borrowers is 10%. So on a $500,000 transaction, the small business owner has to come up with $50,000.
But who has $50,000 hanging around in their bank account? Even if you do have $50,000 in your money market, savings, or mutual funds account; it’s usually ear-marked for a rainy day, kids’ education, wedding, or some other major life event.
So where do our clients find their money? In no particular order here are a few sources:
So what’s an Honest Joe supposed to do? Are there any other sources of cash that won’t subject you to penalties, fines, taxes, or embarrassment around the family buffet?
There is an answer! Our friends at DRDA, PC, a CPA and Consulting firm headquartered in Houston, Texas, researched the issue of utilizing qualified retirement plans to fund a business. Douglas Dickey, CPA, developed the Business Owners Retirement Savings Account plan (BORSATM).
What is BORSA? It’s a tool that allows you to fund the purchase of a franchise, business start-up, or business property using your holdings in a 401(a) pension, profit sharing 401(k), 403(b), 475, or IRA rollover. Through the utilization of a BORSA, these purchases can be accomplished without distributions, taxes, penalties, or the use of loans.
In its simplest form, the BORSA plan allows your retirement plan to purchase shares in your new company. Your business basically becomes another investment in your retirement plan’s portfolio. It’s not a loan to the account holder (you) and it’s not a distribution either. Your retirement plan basically becomes another investment in your retirement portfolio. This solution saves you thousands of dollars in taxes and interest expense. Best of all, it provides cash to your business from the Plan and is not a loan (and therefore not an obligation) for you or your company.
For a nominal fee, DRDA PC can put a plan together for you so you can put your money to work for you. These plans have been approved by the IRS and Employee Retirement Income Security Act of 1974 (ERISA). Certain terms, conditions, and restrictions to apply, so make sure you call DRDA PC before you act.
For more information, I recommend you look at the following websites and documents:
You can also contact Suzy Granger. She’s a great source of information on how to get started:
Suzy Granger
Sales & Marketing
DRDA, PC
suzy@drdacpa.com
Questions? Call us at (734) 214-2726. We’re happy to help!
- Mike
Raising equity is one of the toughest tasks for any aspiring small business owner. Even with an SBA guaranty, banks still require small business owners to put some “skin” into the game by requiring them to come to the closing table with their own funds. This is commonly called an “equity injection”. The minimum equity injection required for borrowers is 10%. So on a $500,000 transaction, the small business owner has to come up with $50,000.
But who has $50,000 hanging around in their bank account? Even if you do have $50,000 in your money market, savings, or mutual funds account; it’s usually ear-marked for a rainy day, kids’ education, wedding, or some other major life event.
So where do our clients find their money? In no particular order here are a few sources:
- Gifts from Family and Friends — Can you look at them in the eye at the Thanksgiving dinner table if things don’t work out and you aren’t able to pay them back for some reason?
- Private Placement Memorandum — Very expensive and time consuming to put together. Expect to pay at least $10,000 in attorneys and CPA fees. Having shareholders also means you have to live with them as long as they still have ownership in your company.
- Borrow Against Your Retirement Account — Even if it’s your own retirement account, you are still obligated to repay the loan. Although this is a viable option, it increases your personal debt service, so banks will see this as a negative.
- Liquidate your Retirement Account — This is also possible, but you will be subject to IRS penalties and fees (especially if you are taking a distribution before you reach 59-½ years of age).
- Leverage your House — Typically we see this in the form of a home equity loan/second mortgage. This happens very frequently; but it puts your home at risk and increases your personal debt service.
So what’s an Honest Joe supposed to do? Are there any other sources of cash that won’t subject you to penalties, fines, taxes, or embarrassment around the family buffet?
There is an answer! Our friends at DRDA, PC, a CPA and Consulting firm headquartered in Houston, Texas, researched the issue of utilizing qualified retirement plans to fund a business. Douglas Dickey, CPA, developed the Business Owners Retirement Savings Account plan (BORSATM).
What is BORSA? It’s a tool that allows you to fund the purchase of a franchise, business start-up, or business property using your holdings in a 401(a) pension, profit sharing 401(k), 403(b), 475, or IRA rollover. Through the utilization of a BORSA, these purchases can be accomplished without distributions, taxes, penalties, or the use of loans.
In its simplest form, the BORSA plan allows your retirement plan to purchase shares in your new company. Your business basically becomes another investment in your retirement plan’s portfolio. It’s not a loan to the account holder (you) and it’s not a distribution either. Your retirement plan basically becomes another investment in your retirement portfolio. This solution saves you thousands of dollars in taxes and interest expense. Best of all, it provides cash to your business from the Plan and is not a loan (and therefore not an obligation) for you or your company.
For a nominal fee, DRDA PC can put a plan together for you so you can put your money to work for you. These plans have been approved by the IRS and Employee Retirement Income Security Act of 1974 (ERISA). Certain terms, conditions, and restrictions to apply, so make sure you call DRDA PC before you act.
For more information, I recommend you look at the following websites and documents:
- www.borsaplan.com
- www.drdacpa.com
- Business Owner’s Retirement Savings Account (BORSA) Overview [PDF]
- Retirement Plan Rollover Checklist [PDF]
- Working with Qualified Plan Rollovers and SBA Regulations: The Opportunity and Issues [PDF]
You can also contact Suzy Granger. She’s a great source of information on how to get started:
Suzy Granger
Sales & Marketing
DRDA, PC
suzy@drdacpa.com
Questions? Call us at (734) 214-2726. We’re happy to help!
- Mike