If you didn’t have to work — would you? Many of our clients at Safe Harbor Financial Services have dreams of entrepreneurship after retirement. Our role is to help them finance their retirement while also taking into consideration their business funding needs. With so many retirees considering starting a new business after retirement, here is some valuable information about how to finance one.
Every new venture needs capital to pay for initial start-up costs that range from materials, production and inventory to management software and marketing materials. According to a recent Federal Reserve survey, only 40 percent of small-business applicants are awarded the full amount of financing they request.1
For people considering launching a new venture, it’s a good idea to consider all possible sources of capital. To avoid taking on a traditional business loan, some entrepreneurs look at alternative sources of funding such as credit cards or home equity. Those considering taking a “loan” from credit cards should be aware that some personal credit cards have more generous promotional offers than small-business cards. Also, if the venture requires travel, one consideration could be using a credit card with rich bonus rewards that can be used to help defray the cost of business trips.2
However, it’s important to recognize that interest rates can be high, and may climb higher as the Fed raises interest rates. Presently, the average credit card interest rate is 16.92 percent.3 Large credit card balances can lower an individual’s credit score, making it more difficult to get a low-interest loan from traditional lenders down the road.
As for home equity, there are two options for using a primary residence as collateral:4
- Home-equity loan — borrow a lump sum and make fixed monthly payments until the loan is paid off
- Home equity line of credit — access a revolving line of credit and pay a variable interest rate on the money withdrawn (note that because the rate is variable, the payments could rise over time)
There are two important caveats to consider with home equity. First, defaulting on payments puts the house used for collateral at risk of forfeiture.5 Second, the interest paid on home equity funds used to provide business capital is not tax-deductible.6
A recent survey found that more than a third of business owners turn to friends and family to borrow money for their business. Rather than ask them for a loan, budding entrepreneurs could ask them to invest. This funding model technically makes loved ones part-owners in the business, which may motivate them to be both supportive and willing to help out since they have a vested interest in the success of the business.7
And finally, one of the perks of 401(k) plans over a pension is the penalty-free access to retirement funds after age 59½.8 Individuals should consult with a financial advisor to get a complete financial picture before considering using retirement funds to start a business. Neither our firm nor its agents or representatives may give tax or legal advice. Be sure to speak with a qualified professional about your unique situation.
At Safe Harbor Financial, we offer a complimentary consultation designed to help you begin or complete your retirement planning. there’s nothing like the peace of mind that comes when you know your portfolio is ready to go the distance. Contact us today to set up your appointment with Jim Byrd and his talented team.
See more about working after retirement here.
1 Tamara E. Holmes. USA Today. April 30, 2018. “Borrower beware: Financing a small business with your own money is tricky.” https://www.usatoday.com/story/money/business/small-business-central/2018/04/30/small-business-week-2018-borrowing/544711002/. Accessed June 18, 2018.
3 Kelly Dilworth. CreditCards.com. July 5, 2018. “Rate survey: Average card credit card rate climbs to all-time high of 16.92 percent.” https://www.creditcards.com/credit-card-news/rate-report.php. Accessed July 6, 2018.
4 Tamara E. Holmes. USA Today. April 30, 2018. “Borrower beware: Financing a small business with your own money is tricky.” https://www.usatoday.com/story/money/business/small-business-central/2018/04/30/small-business-week-2018-borrowing/544711002/. Accessed June 18, 2018.
6 Kenneth R. Harney. The Washington Post. March 7, 2018. “IRS issues do’s and don’ts for deducting interest on home-equity borrowing.” https://www.washingtonpost.com/realestate/irs-issues-dos-and-donts-for-deducting-interest-on-home-equity-borrowing/2018/03/06/6660a892-20b2-11e8-86f6-54bfff693d2b_story.html?noredirect=on&utm_term=.baecdeee93e7. Accessed July 5, 2018.
7 Tamara E. Holmes. USA Today. April 30, 2018. “Borrower beware: Financing a small business with your own money is tricky.” https://www.usatoday.com/story/money/business/small-business-central/2018/04/30/small-business-week-2018-borrowing/544711002/. Accessed June 18, 2018.
Content prepared by Kara Stefan Communications for Safe Harbor Financial Services.