The economic downturn with its subsequent layoffs and disruption leads its victims to react and position themselves to avoid a repeat of the trauma. Interestingly enough, many casual bystanders, having seen friends and family go through such events, come to much the same conclusion.
“Being your own boss” becomes the antidote for the headaches and uncertainty of working for someone else.
Being your own boss directly implies that there is a business of which you are the boss of. Having identified a specific need or interest and drafted a business plan, the cold reality of financing hits budding entrepreneurs right between the eyes.
Traditional credit avenues with banks are simply not there right now for start-ups. Friends and family sources of traditional start-up capital are also feeling the economic anxieties and may be reluctant to wager any savings in light of the future uncertainty.
So what can be done?
While bootstrapping the business is a very viable for many folks with limited access to outside capital, this approach does have its drawbacks, specifically in regards to fast growth. This may not be a problem unless you are in an opportunity in which fast growth is the key requirement for success. If this is the case, other options need to be pursued.
One option has been recently garnering a lot of attention and is focused on those individuals with existing 401(k) retirement programs. As reported in Business Week, Dec. 22) a number of companies have responded to this need to devise a program that will allow folks to tap into their tax deferred accounts to fund their start-up aspirations.
These companies charge anywhere from $4,500 to $7,500 to guide individuals through a process that takes advantage of an “unpublicized tax law that allows individuals to invest their retirement funds in a company.”
It all has to do with the entrepreneur’s forming a new corporation with its own 401(k) program which receives the rollover funds from a previous plan. The new 401(k) plan can invest (purchase shares) in the new corporation and suddenly the new corporation has start-up funds.
As you probably are aware, the key is to ensure the process of “investment of funds” as opposed to simply withdrawing the funds from the previously existing 401(k) account.
Early withdrawal of these funds carries a 10% penalty in addition to the taxes that would have to be paid on the amount withdrawn.
As reported in the article, companies such as BeneTrends in North Wales, Pa., and Guidant Financial Group in Bellevue, Wash., indicate that customer volume is up 30-35 percent over the past year.
Given that you either have the funds in your existing 401(k) program or not, there are underwriting requirements. It’s really pretty straightforward.
Please note, however, the enormous personal risk that this approach encompasses. If the very probable but undesirable outcome of business failure occurs, your “nest egg” is gone.
While many like to focus on the statistic that indicates that 55 percent of small businesses fail within five years, this still means that 45 percent succeed. If you believe that you have what it takes to be in that 45 percent bracket, then maybe this is an option for you to consider.
John F. Riddell Jr., director of the Center for Entrepreneurial Growth-Hamilton County, writes each Tuesday about entrepreneurs and their impact on companies and the marketplace. Submit comments to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at business@timesfreepress.com
John F. Riddell Jr., director of the Center for Entrepreneurial Growth-Hamilton County, writes each Tuesday about entrepreneurs and their impact on companies and the marketplace. Submit comments to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at business@timesfreepress.com.
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