Maybe you’ve always wanted to run your own business, or perhaps you’re reinventing yourself after a layoff. Whatever the reason, you’re over 50 and revved up to do your own thing.
Yet there’s one thing standing between you and your entrepreneurial dream: the money to get going. Having a great idea is far easier than finding the cash to make it happen.
Where can you turn for help? According to the 2018 State of Small Business Survey by Guidant Financial and the Lending Club, 55% of baby boomer small business owners used their own cash to finance the enterprise; more than a quarter tapped a retirement fund.
Atlanta music teacher Adam Cole, 49, is relying on his and his wife’s savings, plus credit cards, to launch his Atlanta music school, the Grant Park Academy of the Arts.
“I’m in the middle of raising my children and putting them through college,” says Cole. “As our investment in our business is coming out of our own children’s futures, I can’t afford to take huge risks. Yet, business being what it is, I can’t afford not to take any risks either.”
This is the quandary for 50-plus entrepreneurs: how do you rustle up money for a business without endangering your financial security? Here are the pros and cons of some common and not-so-common options.
Turn to those around you
If you don’t have a wad of cash just sitting in your bank account, call in your former acts of kindness and ask family and friends to pitch in. In the Guidant/Lending Tree survey, nearly one in five boomer entrepreneurs reported going this route.
Even if you’re tapping a friendly audience, have a solid business plan to show you’re serious. Not only will it help them have confidence in your idea, but it’ll be crucial when any bank, credit union, or angel investors want to put your ideas under a microscope.
Be leery of tapping retirement funds
Relying on your long-term savings is tempting, but perilous. Remember: Half of start-ups fail within the first five years, according to the U.S. Small Business Administration. At this stage of your life, gambling with your retirement fund could mean losses you won’t have time to make up.
“I wouldn’t recommend dipping into any retirement funds,” says Stacy Caprio, co-founder of Accelerated Growth Marketing, a business consulting firm in Chicago. “Save those for when you need them, because you will.”
This is especially true if, like many Americans, you don’t have sufficient savings to begin with. “If there are not enough retirement funds for the 50-plus person to retire comfortably, I don’t suggest taking anything from their account,” says Frederick Towles, an accountant with The Towles Group in Uniondale, N.Y.
But the reality is that many entrepreneurs do dip into this ready pool of cash. If you go this route, Towles suggests touching no more than 5% of your long-term savings.
Approach complex strategies with care
You may hear about a way to avoid the 10% penalty you’d normally face if you take money out of your 401(k) retirement plan before age 59 1/2. It’s a tax strategy known as Rollover for Business Startups (ROBS) program.
How it works is that you roll your plan into a self-directed individual retirement account (IRA) and create a corporation for your business. You can then invest some or all of your IRA in shares of the company.
“Using retirement funds allows an investor more buying power by using pretax funds,” says Kenny Rose, CEO of Semfia, and company that helps people buy franchises.
But this program can be costly and high-risk: The Small Business Administration notes that doing this can draw scrutiny from the IRS.
Hit up home sweet home the right way
You could turn to home equity loans or refinance your mortgage to extract some of the value you’ve built up in your home. Assuming you’ve owned your home for years, if not decades, you may have substantial equity to tap.
This can also be a mistake. “What if the business is not successful? You risk losing the home,” says Ashvin Chheda, a financial representative with Opes One Advisors and Guardian Life Insurance in Addison, Texas.
However, if your children are grown and gone, you could downsize and use some of your profits to fund a new business. “This could be a slightly less risky option,” say Chheda.
And downsizing can cut your maintenance costs, utilities, and property taxes—useful when you’re living on less in the early stages of a start-up. “Your budget also improves with the footprint of a smaller home,” notes Chheda.
Borrow from your insurance policy
“One of the best and perhaps most overlooked ways to fund a business is borrowing against the cash value of whole life insurance policy,” says Keith Moeller, a financial advisor with Northwestern Mutual in Minneapolis.
Any cash value you’ve already built up in the policy is already yours. You get quick access to the money without going through a credit check or submitting loads of paperwork to qualify for a loan.
And these loans are typically not taxable. “This strategy enables you to start a business without tapping retirement funds and risking a stiff penalty or accumulating more debt,” says Moeller.
You can typically repay the loan on your own schedule. If you want to pay nothing one month and large payment the next you can. These loans do accrue interest, which is added to the loan balance.
The downside: If you never pay it back, the loan balance will come out of the death benefit or the surrender value, making it a costly loan indeed.
Pitch to the public
You may equate crowdfunding with personal causes or hip start-ups, but don’t write off sites with big reach like Kickstarter and Indiegogo when you need to get exposure for your ideas. For artists, designers, and other creative types, Patreon is another option.
To stand out on crowdfunding platforms, tell a compelling story, be it your background, the market need you’re addressing, or your product or service.
“Due to their past experiences, older business owners often have an interesting story to share and a compelling, well-thought business plan, says Priyanka Prakash, a financial writer with fundera.com. “People are eager to contribute to entrepreneurs who have things well figured out.”
Whether you need to give backers a piece of your company depends on the crowdfunding model you use. With Kickstarter and Patreon, you keep 100% of your company and provide your backers with small rewards, like product samples or discounts.
Indiegogo allows for that kind of rewards-based crowdfunding, plus equity-based crowdfunding. If you go that route, your backers would receive a small stake in your company.
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