A young lady asked: Do you have  any advice on how to raise money to start your business when you have poor credit?

Many people responded, but I believe they failed to answer her actual question. They said things like:

  • Consider the “Big Picture”.  Write out your SMART Goal. Determine Roadblocks.  Take Responsibility. Take Action.
  • Research non-profit solutions for debt renewal (not paying out for someone to consolidate with sky-rocketing fees. List out all creditors, money owed, etc. Be prepared to answer all questions with clear, full disclosure.
  • First see the money as already in your possession, with no worry as to how to pay back or who or where it came from… see it that way as often as you can during the day, then ask the creator to show you how you can help others with your endeavors…

Then, there were general responses such as these:

  • You can consider finding a business partner.
  • Yard Sales!!!!
  • You can seek loans from family or friends that want to see you succeed at your business (they will also take the chance of you paying them back and not judge you on your credit score), and the last option that you can try is seeking for microlenders or web-based lenders.
  • Crowdfunding

While some of these options are more risky than others, all are decent options worth considering. Something that was not mentioned was this well-kept secret called ROBS – Rollovers As Business Start-ups. This is a somewhat tricky alternative for using your 401k funds to start your business. Even if you do not meet the minimum age to withdraw without penalty, there is an alternative that allows you to use your 401k funds to start a business and not be penalized for it. You’ll still pay taxes if the source money was tax deferred.

Take a look at this blog from SCORE (the nonprofit association supported by the U.S. Small Business Administration (SBA) to help small businesses get off the ground, grow and achieve their goals):

How to Use 401(K) Funds to Start a Business

Personally, I would make this my last alternative for funding my new business venture, but I wouldn’t rule it out; especially if I still had another 20-30 work years ahead of me to rebuild my retirement fund if things didn’t work out.

I recommend you start by putting together a very compelling business plan so you can approach investors and even the bank for a small business loan.  Many business start-ups fail within their first 5 years of business.  Using a ROBS would put your retirement monies at a great risk. If you’re idea is turned down by investors and banks you (and know it’s not solely because of your bad credit), you may want to develop your idea more before investing your own 401k monies into it. Missing this step may make you less likely to really examine your business idea simply because you don’t have to prove it to anyone. Again, I would not quickly rule-out this option.   Since our monies are already invested in the risky stock market, you may simply be exchanging one risk for another…maybe.

If I were going to use a ROBS, I would:

  1. Determine just how much of my retirement I’m willing to risk – I’d say less than 50%
  2. Write up my business plan with all the same effort as if it were going before a group of investors.
  3. Find a local, reputable attorney to set up my c-corp, discuss tax considerations, and other business needs
  4. Find an experienced plan sponsor who can allow me to meet and see and question others who have used their retirement in this way. and walk me through the process
  5. I’d make sure I understand how the IRS views ROBS and what they will expect from me.

Here’s a little something you can read on it from the IRS http://www.irs.gov/Retirement-Plans/Retirement-News-for-Employers—Fall-2010-Edition—Rollovers-as-Business-Start-Ups-Compliance-Project

If you’ve got a fairly sure business idea, using a ROBS is not a bad idea, actually.

All the best to you!

Michelle Walker-Wade, IRS Registered Tax Preparer
Michelle Walker-Wade, IRS Registered Tax Preparer

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