We make money from advertisers and affiliate partners. As an Amazon Associate I earn from qualifying purchases.

How to Successfully Raise Money to Finance Your Startup

401k Business Financing

We've all reached that point in our lives where we have a great idea to build a business around, but just need the capital to take it to the next level. Unfortunately, most of us simply stop there after being rejected by a bank or family and friends but here are some tips to help you succeed with raising money for your startup business idea.

Create a Solid Business Plan and Show Potential

Before you even start asking for money, you need to create your business plan and be laser focused on how you will ultimately create a profit. While there are success stories every day about software ideas that immediately raise billions of dollars in market capitalization - that's likely not you. Instead, focus on what you need to achieve your goals and focus on making them happen. This should include milestones and the ability to demonstrate how you will achieve those milestones. That ability includes both talent and an original idea - but also organization and presentation. While I was running a marketing agency in Chicago years ago, every week a new entrepreneur would show up looking for marketing help - but most of them couldn't even articulate what they needed to do to achieve their dreams.

Don't be that guy - focus on achieving success and create a path to make that happen!

Look For Small Short-Term Revenue Sources

 No financing source is going to be be infinite and I've found that the best way to get some money is to have an existing revenue stream that can be expanded. For instance, I know of some great distilleries that are opening up and many dream of one day producing a fantastic whiskey. However, they start small and quick with a Vodka or Gin - something that is cheaper to produce and doesn't require the extended years of aging. This way they can get stuff rolling with less capital required and build the brand from there.

Consider a 401(k) Rollover For Business Startups 

Once you've created your business plan it's time to secure the funding you need to launch your business. There are numerous sources of business capital available out there from bank loans to venture capital but they can be extremely hard to secure and often come with a high price tag. However, many of you probably already have resources already saved up in your 401(k) accounts that can be used for 401(k) Business Financing. The decision to use this money shouldn't be done on a whim - that's why it's important to have your business plan in place. However, by shifting your 401(k) from investing in the stock market to being an investor in your business, it saves you from the burden of debt and loss of control that other sources of financing come with.

One company that offers 401(k) Small Business Financing is Guidant Financial.  You might be thinking I don't need to work with someone to take a loan from my 401(k).  That's a common misconception that 401(k) Business Financing and a 401(k) loan are the same thing, but they're not.  Using rollable 401(k) funds to invest in your own business was made possible by the United States government who put this into law back in 1974 when the Employee Retirement Income Security Act was passed.  The 401(k) Business Funding process works like this.

  • The business you start/buy has to operate as a C Corp (IRS business transaction requirement)
  • After the C corporation is established, you setup up a retirement plan - most likely a 401(k) - for the business.
  • Then you rollover your 401(k)/IRA funds into the new retirement plan.
  • The company retirement plan buys stock in your C Corp.
  • Once this transaction is completed your old 401(k) funds are available to start operating and paying for business expenses.

If it wasn’t clear from the process above, we want to be crystal clear that 401(k) Business Financing and 401(k) loans are two very different things - we assure you there there are no tax penalties if you use your 401(k)/IRA to fund your business. I wish I had known about this years ago when I pulled money out of my 401(k), because you can use these funds to start or buy your own business and it won't trigger an early withdrawal fee or tax penalties, so you can continue saving for retirement instead of just liquidating the account like I did.

Guidant Financial's program does require that customers roll over at least $50,000 and the funds must be rollable - meaning the funds are from a past employer or you are about to leave the job or they are not part of an employer-based fund. They can also offer similar services on other pretax asset vehicles such as 403(b), TSP, SEP, Keogh, Traditional IRA, 457, and Pensions.  Since this program is made possible through tax law, there are a few other base requirements, such as you are required to be a salaried employee of the business and you must be starting an operating business that is legal on the federal level (ie. can't start a lending company or a pot shop).

It might not be the right solution for every business, but Guidant Financial has worked with more than 14,000 entrepreneurs including NoDa Brewing.

Network With Other Entrepreneurs Online and In Person

Virtually every city has a networking group for startup businesses as well as governmental organizations like the Small Business Administration. These are valuable resources that you should explore for direct advice as well as kinship. Once you make the decision to start your business, it's a unique fraternity that people who have never taken the leap can't understand. There are going to be insider tips you can learn as well as access to funding festivals and pitch workshops that will help you secure additional capital as well as strategic partnerships.

Be Careful With Use of Credit Cards and Short-Term Loans

As a final note - be VERY careful with the use of business credit cards and other high-interest, short-term loans. While these are more difficult to get now than they were a few years ago, financing your idea on credit is a quick way to ruin even the best idea.

Even the "sure thing" situations can quickly get out of hand if something goes wrong. For instance, I once started a company and financed the tradeshow and initial marketing efforts on my credit card. It should have been a sure thing - I had leaders in the industry supporting us, I had accounts pending confirmation at the show ... and then my partner flaked on me and the company died right there. My small $15,000 investment quickly ballooned with near 30% interest and became debt that ultimately caused the company not to be able to achieve success - despite having virtually everything else in line.

Out of control debt is one of the greatest dangers of early-stage financing that you can avoid by being being creative and leveraging your existing assets through programs like the Debt Free Financing that Guidant Financial can offer.  

Let's Stay In Touch!