The start up conundrum

toddktoddk subscriber Posts: 1
edited November 2008 in Startup Funding
I am looking to finance a franchise with upfront fees of $60,000 plus living expenses for first few months.  My options are Benetrends 401k rollover (penalty free)vs. SBA loan.
pro`s and con`s
SBA- aprx $2500 closing cost, payback starts immediately, 2-3 % above prime, Adjustable rate (or so I`ve heard), can ask for first 6 months expenses (I am assuming this is realistic)
Benetrends Rainmaker Plan- Aprx $6500 closing costs, ongoing administration fees of $1000 year,  gives me a 401k to invest in while I am employed by my company, allows me to pick the funds I would like to invest in (Vanguard, T Row Price for example), give potential exit strategy to roll profit form sale of business back into 401k when company is sold.
Knowing this, is it smart to use my retirement savings to invest in my business? 
Is there anything I need to consider that I may not have mentioned?
Is there any financial option I am not aware of?
 
Info that may help in your reply:  I am 41 years old, the 401k has $66,000 in it,my credit rating score is high in excess of 800, If I go with the Rainmaker Plan I would either do a signature loan for the first 6 months of living expenses, or use my cash reserves in bank to cover expenses during start up. The Franchise rep, gentelman form Entrepreneur`s Source, and the rep from Benetrends all recommend the 401k roll over because its quick and there is no business plan to wrestle with...of course they don`t make any money till I sign on the dotted line so that makes me want to investigate the opinions of unbiased people who have or are in similar situations and see what you have done.  Any help is appreciated.
 
Thanks Todd
 

Comments

  • robertjrobertj Tampa Bay, Floridasubscriber Posts: 0 Member
    Todd,
     
    First of all, I think you have to decide if you want to put your retirement savings into this business or get a loan. With your excellent credit, you should be able to get some decent terms.
     
    You`ll want to be sure that the business can generate enough cash flow to pay you and cover the loan payments above the operating expenses.
     
    If your franchise will have employees - you may have to make the 401 available to them.
     
    Finally, if you decide to go ahead and use your 401 - I`d do some homework and check out your options. There is a recent IRS directive that may effect you.
     
    Send me a PM if you want to discuss specifics.
     
    robertj11/18/2008 2:18 PM
  • RetiredMember5RetiredMember5 subscriber Posts: 0
    I would also recommend that you determine what your long term plans and goals are with a calculated rate of return.  Clearly, with a loan, you would still have your 401K as a cushion.  Also, depending upon how your from your company, remember this is corporate debt, unless you must personal guarantee it.   Thus, there are certain legal liability protections with a corporation.  For more on how to start, operate and grow a business in today`s web 2.0 world, check out the FREE entrepreneur guide below.
  • toddktoddk subscriber Posts: 1
    Thank you all for your replies,
     
    Craig, I will investigate the nationalization of 401k plans, I am not familiar with this issue but will definitely look into it.
     
    Robert and Jynell, what Benetrends does is set up your corporation and a 401k plan for the company.  They submit all paperwork to the IRS for a letter of approval.  When you leave your current employer you submit the paper work to the to roll over your money form the old employers 401k to the one set up for your company.  With in the first 90 days of rolling the money you have a window of time to invest your money into your own business by purchasing stock in the you are opening.  There are no penalties.  You can pay your self back as quickly or slowly as you like, as long as you make the minimal contribution to your 401k each year.  When you get a few thousand dollars back into it, you can set up funds with the investment company your choice and then contribute into it just like the one I am doing with my current employer.  When the time comes that you sell your business the proceeds form the sale can be rolled into the fund.  The advantage being the relief of financial burden on a new business.  There are cost to doing this.  closing costs are $6500 with yearly cost of $950 for every year its open till you sell the company roll the 401k to another fund and dissolve the existing one.  The only other options I know of is SBA loan.  More traditional, there is always comfort with that.  My understanding is they are about 3 points above prime and adjustable.  Payments start immediately and may be a heavy burden on cash flow.  Closing cost probably about $2500 plus interest over the course of the loan.
     
    I am not comfortable yet with the concept of the Benetrends because my familiarity is with SBA and traditional loans.
     
    I am hopping to get some ideas, thoughts form different people on how they have started their business.  Any ideas for start up cash other than the two mentioned, and I guess raise some questions about either financial tool that may help me in my decision one way or the other.
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