Providing Startup Financing Solutions Since 2001

Funding Small Business Growth with Individual Retirement Funds

There comes an inflection point in nearly every stage of small business development where growth stagnation is inevitable except for the infusion of some form of capital, human or otherwise. Unfortunately, such inflection points can also be extremely time-sensitive as in, “we need for growth and we need it now!” The recent credit squeeze has also been detrimental as small businesses have been hurt the most by dried-up liquidity in financial markets. Luckily, there are a number of ways to tap existing funds, including using retirement funds as a method for funding small and medium businesses.

Self-Directing Retirement Accounts

While the more complex structure of self-directed IRAs and solo 401(k)s have existed for many years, the rapid mainstream acceptance and affordability of such accounts has only materialized in recent vintage. Unlike a traditional IRA, a self-directed IRA takes administrative control out of the hands of the IRA custodian and gives it back to the account holder. This means investors are free to invest in products other than stocks, bonds, mutual funds and money market accounts.

In fact, most of today’s self-directed providers allow for complete checkbook control of IRA funds. For the small business owner seeking capital, this can provide a huge boon to growing business profits.

A Win, Win, Win

Self-directed investors can use their account to chase investments with higher returns while those needing capital can access it with less of a barrier. Let’s paint the picture a bit more clearly with an actual scenario.

Tim owns a successful electrical supply business. He fulfills orders all over the country for highly-specialized commercial electrical supply products. He’s finding himself a bit constrained when it comes to holding and managing inventory. In effect, if he had a bit more working capital to hold more inventory, he feels his supply would better track the growing demand he’s seeing from his dealers. The problem is that the bank is unwilling to provide Tim with the amount necessary to take the company to the next level.

Tim connects with Brad who has about $300,000 in a rolled-over self-directed retirement account. Because of the unique structure of the account, Tim and Brad can work out either debt and/or equity arrangements agreeable to them both so as to help fund the growth of Tim’s electrical supply business.

In the end, everyone wins. Tim gets the funding he needs to grow his business while Brad is able to obtain great returns in his tax-advantaged retirement account.

Restrictions and Warnings

As with any uniquely-structured financial product, there are always the “use as directed” labels attached. For the self-directed IRA, the rules include prohibited transactions that could ultimately cost investors a great deal more than the potential returns. In addition, having checkbook control over one’s IRA may sound enticing, but it also opens the gambit up for greater instances of fraud and ignorant investing in faulty or failing products, services and businesses.

For the savvy business-owner with the right connections, tapping retirement funds for financing business operations can be a huge opportunity. After all, U.S. retirement accounts have about $13.3 trillion in assets sitting and waiting to be invested.

Nate Nead is a MBA from the University of Washington and business writer for a self-directed IRA and solo 401(k) provider.

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