Self-Funding Your Business

January 24, 2018

 

It would get to walk into a bank and receive a bank loan.  But chances are that is not the way you're going to fund your start-up.  So we hear a great deal about self-funding your start up.  There are several ways to self-fund your business:

 

Your 401 (k)

If you have a 401(k) retirement plan through your employer and are starting a part-time business while you keep your full-time job, consider borrowing against the plan. It's very common for such plans to allow you to borrow up to 50 percent of your vested account balance up to a maximum of $50,000. The interest rate is usually 1 to 2 percent above prime rate with a specified repayment schedule.

 

The downside of borrowing from your 401(k) is that if you lose your job, the loan has to be repaid in a short period of time--often 60 days. Consult the plan's documentation to see if this is an option for you.

Another option is to use the funds in your individual retirement account (IRA). Within the laws governing IRAs, you can actually withdraw money from an IRA as long as you replace it within 60 days. This is not a loan, so you don't pay interest. This is a withdrawal that you're allowed to keep for 60 days. It's possible for a highly organized entrepreneur to juggle funds among several IRAs. But if you're one day late--for any reason--you'll be hit with a 10 percent premature-withdrawal fee, and the money you haven't returned becomes taxable.

 

Stay at your current position

Save your money from your current career and have a end game in mind on with the milestones in place for when your going to start your business, the expected timeframe, and the amount that is needed to start.  Have your separate accounts already set up to have the money earmarked for your business. If you are employed, another way to finance your business is by squirreling away money from your current salary until you have enough to launch the business. If you don't want to wait, consider moonlighting or cutting your full-time job back to part time. This ensures you'll have some steady funds rolling in until your business starts to soar. 

 

Revenue from the business

It you have already put money aside for your living expenses, you maybe able to refrain from taking a salary from your business and fund the business from the revenues.  This is one that many profitable millionaires have started their business and as you can see it works.

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