How to: Financing Your Franchise With Retirement Funds

How to- Financing Your Franchise With Retirement Funds by Neil Burnard

Seeking and obtaining financing for a franchise can feel like an uphill battle. In a volatile world economy, it’s even harder. Unfortunately financing options like standard bank loans, SBA loans, or even loans that are secured by equity (eg. your home) are sparse these days. So how are you supposed to finance your dream franchise?

There is one option people often overlook: you can use your retirement funds as your source of financing. Most people assume they should only use that money for it’s original intent (retirement), but using your retirement funds to finance your franchise can help you escape massive debt and high interest rates. It can actually be a wise decision, so long as you educate yourself on what’s the best way to go about using these funds.

There are two main ways you can source money from your retirement account. Depending on what country you’re living in, the particulars can vary slightly. Take the US for example: the first and simplest approach is to borrow the money from your 401(k). Depending on what kind of account you have set up, you can borrow up to 50% of your total amount or $50,000, whichever is less. Keep in mind that with this approach you will have to set up a repayment plan with interest for your 401(k) and rules and regulations will vary according to your plan provider.

The second, but more complicated, way for you to tap into your retirement funds is with the Rollovers as Business Startups (ROBS) approach. This plan allows you to open your company, set up a retirement account within you new business, and then move your existing retirement funds into that new retirement plan. After that, you are basically free to direct and use the funds in the retirement account as you see fit.

Just some of the advantages the ROBS approach are:

  • Control: Because you are not subjected to typical restrictions other financing approaches may impose on you, you will have the ability to use the money when, where, and how you want without having to worry about extensive paperwork or delays.
  • Minimal fees: Usually, you will not have to deal with any transactional or asset-based fees once you redirect your retirement plan. This translates into saving a good amount of money that otherwise would be spent on traditional fees and commission expenses associated with traditional financing plans.
  • Diversification of investment: Because you don’t have any restrictions limiting you on how you can invest, you can invest anywhere. Consider investing in stock and bond mutual funds, other business opportunities, real estate, etc.

Additional pros:

  • It doesn’t involve any usual limitations and repayment requirements associated with a standard loan from your 401(k).
  • It can be used with an IRA account.

The greatest thing about the ROBS approach is that ultimately you’re the one making all the investment decisions. You’re not tied to some individual or entity that chooses for you the fate of your company. But again, when it comes to financing your franchise, it’s important you fully educate yourself before you start making any financial decisions. This list of advantages should serve you as a guide, but ultimately you will need to figure out what’s best for your individual circumstance and your franchise dreams.

Other countries will have different retirement plans/codes as well as their own regulations, so look into every option that is open to you before making your final decision.