Starting a business requires a lot of capital to get operations off the ground, whether you’re securing equipment, paying salaries, or purchasing real estate. Not everyone has the money to pay for everything out of pocket, which makes it essential to seek out business loans and other financing options.
One popular method of new business startup funding includes dipping into your 401(k) plan to guarantee financing. Learn how you can start a business using your 401(k) and the advantages and challenges it brings.
Why You Would Need To Use Your 401(k)
One of the major drawbacks to traditional funding is the amount of time it can take to secure funding; depending on the organization, getting the money in your hands can take weeks or months. This is impractical when business-owners have time-sensitive deals; putting off plans for a few weeks can financially destroy a startup.
Using your 401(k) allows for immediate funding without the hassle of dealing with loan offices. These offices may even deny you a loan after the process begins, slowing down funding even further.
The Steps To Take Out Your Money
You’ll need to contact your 401(k) administrator and fill out a form with the requested amount of money. Typically, business-owners can find these forms online and fill them out quickly, receiving the money in their next pay period. Alternatively, you can speak to your current company’s human resources department for specific instructions for the fastest way to receive the funds.
Some Considerations to Using Your 401(k)
Utilizing your 401(k) isn’t without its downsides; if plans don’t work out as you intended, they could set back your retirement years. Be aware of how much you have in your account and what that amount will look like if your business is unsuccessful. You’ll need to budget for the worst-case scenario: losing money on your investment.
You also need to look at the tax advantage growth and whether leaving the money in your plan or taking it out now is more beneficial. Leaving your 401(k) alone to grow over time may be far more profitable than using it as a short-term loan.
Taking money out of your 401(k) plan is a considerable risk, despite the immediate benefits it affords. Many financial experts recommend using it only when you have no other option and, even then, only when you know you’ll see a relatively quick return. Determine whether you want to use your 401(k) to start your business—or if you even should.
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