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Franchise Funding Options: Funding a Franchise Even With Retirement Savings

by Seth Lederman

When you work for someone else, you are doing just that – working for their wealth accumulation. The only natural way to build personal wealth is by working for yourself, either by starting your own business or buying into a well-established franchise.

As we return to a post-pandemic world, many wonder what the stock market will do and how the recovery period will affect their retirement accounts. Although no one can ever say for sure what the best place to invest money for your future is, there are ways to minimize risk while maximizing asset accumulation. 

The problem is that the closer you get to retirement, the less risk you want to assume in your investments. But if you don’t have enough and are inching along, you might have to scale things back after retiring. The good news is that funding a franchise might be your ticket to living more than comfortably during retirement without assuming a significant amount of risk.

When you work for someone else, you are doing just that – working for their wealth accumulation. The only natural way to build personal wealth is by working for yourself, either by starting your own business or buying into a well-established franchise. When you own your own company or franchise, you no longer work for someone else’s financial health – you build your own. 

Your Business Funding Options

Man pointing finding at the word funding

If you are looking to switch gears and try a new and much more lucrative path than the daily grind, you might be considering your business funding options. Whether you decide to start a business from scratch or buy a franchise, you will need funding to start. 

How Will Debt Affect Your Business’s Growth?

Many people who start their own company or business take on a considerable amount of debt to get it operational. When you take out a traditional loan, you have to start making payments immediately, whether you are breaking even or not. When you don’t have a lot of capital, to begin with, it can complicate the beginning stages of your new business’s ability to achieve growth. When you don’t have assets upfront, you have to walk a fine line between generating profits and repaying loans. Also, if you have outstanding debts, it can severely impact your personal life. If you are not turning a profit, paying yourself a salary becomes very difficult. That is why a debt-free start-up is the best way to realize the most growth early on.

Debt-Free Funding Options

There are two options for a debt-free start to your new business venture.

Rollover for Business Start-Ups (ROBS)

Because taxes are structured, many people lock their savings into retirement plans like 401(k)s and IRAs. Many mistakenly think that they can only use their retirement funds to purchase investments, such as mutual funds, bonds, or publicly traded stock options. But the facts indicate that a good majority of entrepreneurs use their retirement savings to fund start-up businesses, which is entirely legal if set up correctly. 

When you properly use your retirement savings, you can avoid tax consequences and penalties associated with early withdrawal. If done incorrectly, $200k withdrawn from a 401(k) or IRA account can leave you paying as much as 10% of the total in penalties and upwards of 30% in taxes, which would go you with only about $120k when all is said and done. 

With the help of professionals with extensive knowledge in the Department of Labor and Internal Revenue Service’s inner workings, you can access your retirement funds without penalties or income tax consequences. Technically, the IRS called this funding Rollovers for Business Startups (ROBS). When using the ROBS method, you can retain the entire $200k to fund your new venture. 

The Advantages of Launching Your Venture with ROBS
  • You can gain access to your retirement funds without early withdrawal consequences or penalties
  • You receive a tax-deferred status of your retirement funds
  • You will not have any business or personal debt 
  • Funding can be quick, sometimes in as few as ten days 
  • You can use the funds to pay yourself a salary to maintain your status of living
  • You don’t have to worry about the state of your credit score
  • Most retirement plans qualify, including 403(b), 401(k), and IRAs
  • You don’t have to withdraw or use all of your retirement savings — you just take what you need
  • You can use retirement funds as a cash down payment for Small Business Administration Loans, if necessary

ROBS funding options also mean that you won’t have an interest or a principal payment that you have to start paying down immediately. When you have payment obligations, it can limit your ability to grow your business, especially as a start-up. If you use your retirement funds, you can help to reach profitability status at a much quicker rate. And since it is your investment money, you won’t be leaving your wealth vulnerable to things like loan repayment requirements or the risk of providing or losing collateral. 

Cashing in Your Savings or Checking Accounts

Some people are tempted to use their checking and savings accounts to buy a business. But they fail to see that they have already paid taxes on the money in their checking and savings accounts. When using your retirement funds, you use pretax money, which means that you will have nearly 40% more to invest in your new business venture.

Funding Options That Involve Debt

Another option that you can choose is to fund your business using debt financing. This is a very common path where you borrow money that you have to repay with interest. The various types of debt funding options include:

Home Equity Loan

Homeowners can sometimes choose a home equity loan to finance their business start-up. Typically, you can borrow as much as 85% of the equity that you have in your home from a traditional lender or bank. However, if you choose to use a home equity loan to fund your business, you are putting your home and family at risk. If you are unable to keep up with monthly payments, lenders can legally foreclose on your home.

Borrowing From Your Retirement Account

Many retirement plans will allow you to borrow against your account. Borrowing money against your retirement plan differs from a ROBS situation. Often called a 401(k) loan, it can help alleviate short-term financial issues; you can also borrow from it to use as funds for your venture. A 401(k) loan funding method has inherent risks, including:

  • You are limited to borrowing only 50% or $50,000, whichever is the lesser of your overall account total.
  • Not all employers offer a loan option.
  • You only have two months to repay in total if you choose to leave your employment, or you will incur penalties and taxes.
  • If the business closes, you will be required to pay as a distribution.

Personal Loans From Friends and Family

Another option you might have available is borrowing money from family and friends. Many family members who are in a position to help will do so. And they are usually willing to scale back the repayment terms and interest significantly compared to traditional lending institutions. The problem with doing business with family is that if things don’t go so well, it can stress your relationship. And if your business doesn’t end up making it, it can lead to hardships and even lost ties. 

SBA Loans

SBA loans are highly attractive to many looking to start up a business. With an SBA Loan, the Small Business Administration will reduce a lender’s risk by guaranteeing to repay a part of the loan if you fail. The biggest problem with an SBA loan is that they are often complicated, they take a long time, and you have to have a good credit rating to be approved. Once more, you assume a lot of debt that needs to be repaid.

Why ROBS Might be the Best Solution

When you weigh all the facts about the safest and most lucrative way to start up a business butt and grow it quickly, using a debt-free method is best. If you have money sitting in your retirement fund slowly earning safe profits, now is the time to turn those slow profits into wealth accumulation that will far exceed whatever your retirement plans are currently making. If you plan, research to find the proper franchise start-up, and have a professional’s help, using your retirement funds is a no-brainer — if you do it correctly. Not only will you realize significant gains, but you will also avoid paying taxes and penalties in the long run. 

Most Frequently Asked Questions About Funding Via ROBS

 

There are some common questions that most people have about using ROBS to fund their new business venture, such as:

Is it necessary to roll over the entire amount of the funds in the retirement account?

No, you can take only what you need to begin your new business and leave the rest invested in your retirement plan.

Will Different Companies Offer Different Plans? How do you Know Which One is a Good Fit?

Companies will often offer a specific plan, so it is essential to shop around to find the one that will best fit your needs. Every business owner will have their own set of requirements, so finding a company that will customize a plan for your specific situation is critical. 

How Important is an Exit Strategy?

Although you are securing your financial future by opening and operating a successful business, the entire reason behind it is so that you can retire comfortably – the operative idea is to retire. When you are ready to close up shop and enjoy your life without responsibilities, you want to have a plan in action to exit on the best terms possible. It is important to have a strategy in place with the help of a professional to do so with the lowest tax consequences possible. 

“If one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours.” –Henry David Thoreau

 

DISCOVER A BETTER WAY TO EARN WHILE LIVING

Profits are Better Than Wages

Tired of putting in hours of hard work while someone else benefits? You can earn money in a way that fits your lifestyle rather than the other way around.

In “Profits are Better Than Wages”, experienced franchise advisor, Seth Lederman answers the “how” and “why” of going into business for yourself.

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Assessments

What kind of franchise business will match your skills, experience, passions and even more important...your personality? Answering these questions now, will save you time and grief during your search.

Industry Guides

Learn about the various franchise industry segments, from Home Services to Beauty, and more. With nearly 4000 available franchise opportunities, understanding the pros and cons of the industries is crucial for a successful franchise search.

Events

Having helped hundreds of people get into business ownership through franchising, we are in a unique position to educate prospective franchise investors.

How-To Articles

On our quest to share the best in franchise information, we've developed a series of How-To articles with practical advice to move you forward in your franchise search.

Videos

View our collection of educational franchise videos for large investors and first-time entrepreneurs.

Blog

The FranBlog is a trusted digital publication, providing news and information that entrepreneurs and franchise investors want.

LEARNING CENTER
Basics

Are you sick of the 9-5 grind and actively looking for alternatives? Start with the basics of going into business for yourself.

Intermediate

Searching for the right franchise opportunity is like looking for a needle in a haystack. If you want to search smarter, not harder, check out the franchising insights and knowledge to get you there faster.

Advanced

You've decided to explore franchise ownership. Now, making it a reality with tips for vetting, funding and minimising the risk of your franchise investment.

Help Center

Do you have questions about investing in a franchise? Check out our comprehensive help center for answers. If you don't find what you're looking for, submit a question and our team will get back to you.

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