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Financing Options for Starting a Business Later in Life

5 ins and outs of financing a post-retirement business

A survey by Rutgers University in 2005 found that 15 percent of working people in this country expected to start their own businesses when they retired. Given the continued impact of the economic crisis on retirement accounts and Americans' growing desire to stay career-active into retirement, this statistic seems very likely to grow.

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So how do retired entrepreneurs obtain the capital they need? How much does starting a business really cost? What loans are available? Should you break into your retirement nest egg?

Here are some considerations and options for financing a post-retirement business.

spinner image Calculating Expenses Using Adding Machine, Financing Your Start Up Business
Photo by Dureuil Philippe /ès/Corbis

Starting a Small Business

Calculate how much starting a business will cost you. — Photo by Dureuil Philippe /ès/Corbis

Starting a business needn't cost much.

Not all businesses need lots of capital to get off the ground. Many home-based businesses, for example, can be started for about $1,000 or less, with most of that funded with a business credit card. Home-based franchises can get going for as little as $2,000. To help determine how much your business venture would cost, read "How to Estimate the Cost of Starting a Business From Scratch," a U.S. Small Business Administration Web page.

Get advice from SCORE.

A great way to start weighing your financing options is to talk to an expert business counselor from SCORE, a nationwide nonprofit association dedicated to educating entrepreneurs and helping small businesses start, grow and succeed. SCORE pairs aspiring business owners with mentors who have extensive real-world experience.

Access capital via SBA-backed small-business loans.

Have you taken a look at an SBA-backed loan? Over the past year, small-business loans backed by the SBA reached the highest volume mark in the agency's history — more than $30 billion.

Loans are available for a variety of purposes, including starting and expanding a business, exporting products or services overseas, and supporting green industries. SBA's Loans and Grants Search Tool lets you quickly find financing for which you might qualify. You can also talk to your local SBA office.

Using private investment money.

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Private investment in the form of venture capital, angel investing and even government venture capital programs tends to be reserved for high-growth start-ups. If this is you, read "Five Tips for Finding and Securing Private Investors for Your Start-Up."

Borrowing against or tapping into your retirement account.

If you've exhausted all other options, you may find yourself wondering whether you should borrow against or tap into your retirement funds. It's likely most financial professionals will advise you not to. The risks are high. But using your own retirement money can give you a degree of flexibility and control over your business investment decisions that you won't have if you're borrowing from financial institutions.

Prudent financial planning, including consultation with a business mentor, will help you weigh options, risks and funding sources to decide whether to pursue your entrepreneurial dreams this way.

You can find other resources for making this difficult call at this Federal Deposit Insurance Corporation Web page or at, a site run by the Financial Literacy & Education Commission, a joint effort of 21 federal entities.

If you do opt to use your retirement savings to fund your business, here are three options:

1. Borrow against your 401(k). Instead of withdrawing funds outright, you could take a personal loan from your retirement account. If you have a 401(k) account, you can typically borrow up to 50 percent of your funds or $50,000, whichever is less. Unlike with business loans, repayment terms require that all of your loan be repaid to your 401(k) within five years on a quarterly payment schedule. You'll also need to pay interest on the loan, usually about 1 percent, which goes back into your 401(k).

Before you can take a personal loan from your 401(k) you will need to do a few things:

  • Incorporate your business to reduce your personal liability;
  • Arrange to buy all of the stock in your business with the loan from your plan;
  • Roll your remaining 401(k) assets into a new plan managed by your incorporated business.

Be sure to talk to your accountant and your existing 401(k) administrator and get the right professional advice before embarking on this option.

2. Invest 401(k)/IRA funds directly in your business. If you really must tap your retirement funds, tax law allows you to do it without penalty or interest if you follow certain rules — which can get complicated. Essentially, you will need to structure your business as a "C corporation" that will issue all of its stock and transfer it to a new 401(k) profit-sharing plan in exchange for the cash in the plan. You will need the help of a tax attorney or accountant to handle incorporating and setting up the new retirement plan.

3. Withdraw directly from your 401(k). This should be your last option. Anything you withdraw is subject to regular income taxes and could draw a hefty tax penalty depending on your age (10 percent if you're 59-1/2 or younger).

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