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Need capital for expanding business. Should I take out 401k?

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seamist
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Need capital for expanding business. Should I take out 401k?  Reply with quote  

Hello!

Any advice is much appreciated!!!!! I am in independent contractor working for my mother's permanent hair removal business. I will own the business in 4 years when she retires... possibly sooner. These past 18 months have been extremely busy since I did some updates and advertising. We currently have a long waiting list for new clients, the majority of which are willing to wait. We share an office, I work 2.5 days and she works the rest. She is not ready to give up any of her days yet. I net an average of $500 per day.

I have decided that there should be enough business to sustain a second, more central, location 5 miles away for an additional 2-3 days a week. I have secured a very affordable sublet with a 1 year lease. To open this second location, I need about $5-6k to cover some new supplies, insurance, and to have a bit of a cushion. Not very much money at all. What are some options for obtaining the funds?

Since I am an independent contractor and I don't own the business yet, can I even get a business credit card or loan? If so, I only have "fair” (borderline good) credit due to issues from being laid off 7 years ago. Plus those funds could only go towards the business and not to personal if needed (i.e. if car breaks down). I am currently debt free and don't like the idea of getting back into debt if I don't have to.

My husband has a 401k which he is wanting to take money from. According to my calculations, we would be taxed 35% on that (due to our tax bracket and a 10% penalty). Should we take $9,500.00 out of the 401k and eat the 35% to get $6,000?

I have heard of ROBS account which would rollover 401k for funding business but that sounds like a lot of paperwork and red tape for the small amount that I need. And I think we would have to incorporate the business.

Thank you in advance for any advice!
Post Tue Sep 01, 2015 4:33 pm
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oldguy
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quote:
ROBS account


Yeah, it would be a hassle, the minimum is $30,000, you have to incorporate, then set that qualified money aside inside the new corporation.

Rather than cash out your husband's 401k, you could borrow from it, probably at about 5%. That way you would not have a taxable event, just borrow the $6000 that you need.

About that new location - it's only 5 miles, but you client waiting list is based on the convenience of your old location. Many clients pick service places that are within a block or two of their home, some pick spots that are between home & work - if you move 5 miles, you'll lose a big part of the waiting list.
Post Tue Sep 01, 2015 7:00 pm
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seamist
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Thank you!

My husband just told me that he forgot when he changed jobs that he rolled his 401k over to an IRA Sad It looks like you can only borrow against an IRA for 60 days. Very frustrating.

Going to apply for a business credit card and see what happens. I was told I can write off the interest?

I totally hear where you're coming from about the change in location. But I've already asked many existing clients and for many of them, the new location is closer. Plus new location has pletny of free parking where the old one was downtown where the lack of parking is a major issue. New location is in a bigger city (pop 80k ppl) where there are NO other electroligists. Successful electrologists are few and far between in our area these days. We have a great track record, yelp reviews, and word of mouth since the company has been established for 31 years now plus we've purchased phone numbers from recently retired electrologists. I've only gotten positive feedback from clients about new location. I think it's a good move.
Post Tue Sep 01, 2015 10:27 pm
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littleroc02us
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How long would it take for you to save the 5k?

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed Sep 02, 2015 2:52 pm
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seamist
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Probably around 9 months
Post Wed Sep 02, 2015 3:02 pm
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littleroc02us
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Does that mean the business your running isn't necessarily bringing in much of a salary for you if it would take that long to save the money or is this a part time adventure as you stated only working 2.5 days a week. When your saying 9 months is that only money your saving from your income or does that include your husbands income?

Anyway I look at it, it's a wiser decision to save the money and stay out of debt.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed Sep 02, 2015 3:22 pm
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