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Franchise & Business Opportunity News

Business Financing with IRAs and 401(k)s: Set to Explode!

Written on October 18th, 2007 by Ryan Lee in Franchise Industry.

Here is a timely article that we saw in the newsletter from our friends at Guidant Financial:

This past week, USA Today released an article titled “401(k) Loans Come With Caveats.” The article laid out the pros and cons of taking a loan from a 401(k). Almost instantly, Guidant began receiving calls from concerned business partners asking what to make of this data.

A 401(k) loan can be appropriate in certain situations, and there are definitely some arguments that can be made for and against them. But how is the article’s info relevant in regards to the 401(k) funding solution provided by Guidant Financial Group? The answer is that it simply helps to emphasize its importance.

The 401(k) loan allows the client to withdraw up to $50,000 or 50% of the vested balance, whichever is less. It ties the client to debt (although interest is paid to their own 401(k)), which most new business owners would prefer not to carry whenever possible. A 401(k) loan is typically a point or two above the prime rate; however, it’s amortized over 5 years. That is an extremely short timetable.

To give you an idea of the impact on a small business owner, we have come up with the following illustration:

It is understood that the amount paid over the term of the loan are different. However, the #1 reason a new business fails is a lack of money… or more specifically – negative cash flow.

Another important point is: If a franchisee uses a 401(k) loan to buy a franchise, then it would likely have to be one purchased by an absentee owner. If the client left the employer that sponsors the 401(k), they most likely would call the note due within 90 days… meaning the 401(k) owner would have to pay it back. As you know, they probably cannot – and thus the reason they took the loan in the first place.

The better alternative may be using Guidant’s biz-funding solution Audeo™. This 401(k) funding solution allows a client to invest up to 100% of their retirement funds (not limited to $50,000) without taking a taxable distribution or incurring penalties. When a client uses Audeo™ to fund their business, they do not have to pay the money back because it is not a loan. Just as if you bought a publicly traded stock, the private business is an investment held in the 401(k)!

If you are not familiar with this strategy, or you previously dismissed it, you may want to take a closer look at it and strongly consider integrating it into your business strategy. The 401(k) funding solution is the fastest-growing segment of business funding, and that trend will continue for at least the next five years. The amount of money growing inside of retirement plans is astounding. Factor in the existing credit crisis that is crippling the borrowing system, and you have a perfect storm to bring self-directed retirement plans, like the 401(k) funding strategy, to the forefront of the industry’s financing methods.

Currently, there are over $16 trillion in retirement assets across the country. Traditionally, this strategy works extremely well for people who have in excess of $100,000 to invest. In 1999, the only age group that averaged $100,000+ in 401(k) funds was over 60 years of age. In 2003, that average bled into the people above the age of 50; and then, in 2005, it moved into the 40s. The size of the demographic truly eligible for proper use of the 401(k) funding solution is growing at an exponential rate.

As those in the franchising industry become more aware of this strategy, their ability to close deals will increase. The favorable trend is evident, with much growth still on the horizon.

Guidant’s 401(k) funding solution is unlike any financing strategy. The approval process is painless. There is:

* No credit approval necessary
* No debt service to carry (unless used in combination with a loan)
* No collateral needed
* No income or assets needed

Guidant Financial Group is the nation’s leader in self-directed retirement services. This year alone we will help over 3500 people use their retirement funds to invest in alternative assets. We help professionals sell businesses in all 50 states.

Guidant leads the way in this industry because we have superior:

* Deal Speed: Average deal speed of 18 days
* Referral Systems: Close a deal with Guidant, and you earn compensation and can receive leads
* Infrastructure: Revenue opportunities for eligible partners who send us deals
* Experience: We’ve done more deals than any other competitor
* Value: Our client’s receive a superior product
* Service: We provide world-class customer service
* Knowledge: The largest, most educated staff to work with you and your clients
* Security: Guidant has more stringent compliance measures – decreasing your liability as a referrer

If you’d like to explore how to finance your franchise, contact brandEXPANSION.

One Response to “Business Financing with IRAs and 401(k)s: Set to Explode!”

Mike Stansell Left at 6:15 pm on April 8th, 2008
1

Would you be able to help me take the existing funds out of my 401(k), which is maintained by my current employer? I would like to get my new business established prior to quitting my job. Could you give me an idea of what your services cost?
Thanks!