From USA Today Read it all here.
Don Poffenroth paged through a magazine on a flight several years ago when an article grabbed his attention: Entrepreneurs could use 401(k) savings to start a business without getting hit by taxes and early-withdrawal penalties.
He and a partner had drawn up plans for a gin, vodka and whiskey distillery in Spokane, Wash., but they struggled with the best funding options.
“Neither of us was rich,” he says. “We didn’t want to have to sell shares in the company to start with. But we both had long corporate careers, and so our 401(k) plans appealed to us.”
Poffenroth and Kent Fleischmann used their 401(k) savings, a working line of capital from a local bank and additional personal savings to fund Dry Fly Distilling in 2007.
Risking their retirement nest eggs has paid off so far: Dry Fly Distilling has garnered national and international awards, and its products are sold in 19 states and several Canadian provinces. Business doubled last year, Poffenroth says. Their 401(k) funds were converted to company stock as part of the start-up, and the stock value has doubled as the $2 million firm has grown…
Little reliable data exist about how many entrepreneurs use retirement nest eggs to start businesses.
But business advocates and many financial firms have pushed the idea the past two years as the lagging economy and ongoing credit crunch have dried up many funding options. Last year, 39% of small-business owners said they were unable to get adequate financing, more than the 22% who said the same in August 2008, according to a 2009 year-end report by the National Small Business Association, a non-profit organization.
Prior to the housing market collapse, many entrepreneurs took out home-equity loans to provide seed capital. But that option has disappeared for most.
“Clearly, retirement assets are an untapped source of capital for many folks who are trying to start up a plan,” says Mark Davis, senior vice president at SunTrust Investment Services. “There are providers that would happily facilitate them. But I wouldn’t recommend that anybody do it to a large extent with retirement assets.”
Yet many entrepreneurs see the other funding options as risky, too.
Lenders often require loans to be collateralized with a home or other finances, says David Nilssen, co-founder of Guidant Financial Group, which helps provide small-business financing. Loans can also come with high interest rates, and the entrepreneur may have to start payments before the business even earns any money…