The topic of startup funding is a stressful one for many entrepreneurs. They have big dreams for their business, but they aren’t sure how to get it off the ground without large amounts of debt. Fortunately for aspiring business owners, there are numerous ways to tap into the money you already have at your disposal.
Why fund a business with equity?
Equity is the ownership of assets minus liabilities, whether it’s your vehicle, home, or retirement funds. It’s the value of things you own and, if liquidated, money you can use at your discretion—like launching a new small business.
Using your equity to fund a new business has advantages over other financing methods. First is speed. Leveraging your equity for business financing is often a fast process, allowing you to open your doors that much sooner.
Another big benefit is the ability to launch without debt. Taking out a new loan can be risky if your business isn’t as profitable as you expect, putting you at risk of losing much more than you initially borrowed.
Lastly, some financing methods aren’t always feasible for new businesses. Your startup may not qualify for a bank loan for any number of reasons. Using your own cash or equity may help you avoid these qualification hurdles.
Options for your new business funding
When it comes to funding a new business with equity, there are a few different options. Most people have a range of assets they can tap into—but each has its own rules and considerations.
- Cash: One of the easiest ways to infuse a business with your assets is to tap into cash you’ve accrued in a checking or savings account. That money is available to spend immediately, without strings attached. Many entrepreneurs plan for a cash infusion by putting money into a business-specific savings account leading up to their launch.
- Home equity: If you own a home, your home equity is another way you can fund a startup. Home equity is the value of your home, minus what you owe on the mortgage. For example, if your home is valued at $400,000 and you still owe $250,000, your equity would be $150,000. You’d be allowed to tap into that equity in a few ways. A home equity loan is a loan secured by your home, providing a lump sum of cash for typically low interest rates. A home equity line of credit (HELOC) is a revolving line of credit that lets you withdraw funds and only pay interest on what you borrow.
- Retirement plan distribution: If you’ve been building your retirement savings over the years, you may be able to tap into those savings for business financing. If you’re above the minimum age for retirement plan distributions, you could use those funds to pay for a startup. Remember that traditional retirement plan distributions are taxable, so you’ll have to account for the taxes on those funds. Distributions are also subject to early withdrawal penalty. It’s important to weigh the tax and penalty implications before proceeding with this funding method.
- ROBS: There’s another way to use your retirement savings to pay for a new business: a Rollover as Business Startup (ROBS). ROBS is a funding mechanism that allows you to “rollover” an existing retirement account into a new self-directed 401(k) and invest in your own business. Essentially, the new plan buys equity in your business, converting your savings into cash! ROBS lets you tap into those savings without IRS penalty on a tax deferred basis provided certain parameters are met. Using your pre-tax retirement account(s) to fund a business also allows you to preserve your cash on-hand. Working with a qualified Third-Party Administrator will ensure your ROBS is set-up correctly and remains in compliance with the IRS. Startups and franchises both qualify for ROBS, in addition to purchase a resale (a business already open and you purchase from the current owner) or even to recapitalize an existing business.
You’re worked hard to save and invest in your financial future. Use the equity you already have and transform it into funding for your new business venture! Contact Tenet Financial Group to explore your funding options and launch your dream business or franchise today.