Starting a Business Later in Life? Financing Options for Retirees and Seniors

According to The Senior Source, in 2005, 15 percent of working people expect to start their own businesses when they retire.  However, given the continued impact of the economic crisis on 401(k) plans and a growing desire to stay career-active into retirement, this statistic seems very likely to grow.  

In an earlier blog I listed five things senior entrepreneurs need to consider before they tap a lifetime of experience and put a business idea into action. But how do retired and senior entrepreneurs access the capital they need? How much does starting a business cost? What loans are available? Should you break into your retirement nest egg?

Here are some considerations and options for financing your post-retirement business

Starting a Business Needn’t Cost Much

Not all businesses need a significant amount of financing to get off the ground. Home-based businesses, for example, can be started for around $1,000 or less and most of the start-up costs can be funded with a business credit card. Home-based franchises can also be started for as little as $2,000. To help determine how much your business venture will cost, read How to Estimate the Cost of Starting a Business from Scratch.

Get Advice from SCORE

A great place to start weighing up your financing options is to talk to an expert business counselor from SCORE, a nationwide nonprofit association dedicated to educating entrepreneurs and helping small businesses start, grow, and succeed. SCORE pairs aspiring business owners with mentors who have extensive real-world experience. 

Access Capital via SBA-Backed Small Business Loans

Have you taken a look at an SBA-backed loan? Over the past year, small business loans backed by the SBA reached the highest volume mark in the agency’s history, supporting more than $30 billion in lending and returning nearly to pre-recession levels.

These loans include a range of options and are available for a variety of purposes, including starting and expanding a business, exporting products or services overseas, and supporting green industries. SBA’s Loans and Grants Search Tool lets you quickly find available financing for which you might qualify. You can also talk to your local SBA office.

Private Investment Money

Private investment in the form of venture capital, angel investing, and even government venture capital programs tend to be reserved for high growth start-ups. If this is you, read Five Tips for Finding and Securing Private Investors for Your Start-Up.

Borrowing Against or Tapping into Your Retirement Account

If you don’t have any savings or have exhausted all other options, you may find yourself wondering whether you should borrow against or tap into your retirement plan. It’s likely most financial professionals will advise against you not to. Entrepreneurs are risk-takers, though, and the risks are high, although using your own retirement money can give you a degree of flexibility and control over your business investment decisions that dealing with financial institutions can’t match.

Here are three options for using your retirement plan to fund your business:

1. Borrow Against your 401(k) – Instead of simply withdrawing funds outright, you could take a personal loan from your retirement account. If you have a 401(k) account you can typically borrow up to 50 percent of your funds or $50,000, whichever is less. Unlike business loans, repayment plans require that all of your loan must be repaid to your 401(k) within five years on a quarterly payment schedule. You’ll also need to pay interest on the loan, usually around 1 percent, which goes back into your own 401(k).

Before you can take a personal loan from your 401(k) you will need to do a few things:

• Incorporate your business to reduce your personal liability
• Buy all of the stock in your business with the loan from your plan
• Roll your remaining 401(k) assets into a new plan managed by your incorporated business

Be sure to talk to your accountant and your existing 401(k) administrator and get the right professional advice before embarking on this option.

2. Tap into Your 401(k)/IRA to Invest in Your Business – If you really must tap into your retirement funds, tax law allows you to do it without penalty if you follow the rules – which can get complicated. Essentially, you will need to structure your business as a C Corporation that will issue all of its stock and transfer it to a new 401(k) profit-sharing plan in exchange for the cash in the plan. While it only takes a few steps to get started, you will need the help of a tax attorney or accountant to handle incorporating and setting up the new retirement plan.

3. Withdraw Directly from Your 401(k) – This should be your last option. Anything you withdraw is subject to regular income taxes and could draw a hefty tax penalty, depending on your age (10 percent for those 59½ years old or younger).

Related Resources

• Senior Entrepreneurship – How to Tap a Lifetime of Experience into Business Success
• Business Advice for Retirees

About the Author

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley