Entrepreneurs who have dreamed of starting their own companies may be interested in what seems to be a new trend in getting startup funds needed for business formation. According to a report from CIO Today, many entrepreneurs are starting to dip into their retirement savings to finance their startups.Using 401(k) funds is definitely a gamble, but it also comes with some benefits. Drawing startup funds from these savings plans means new business owners won’t get hit with certain taxes, and they will not have early-withdrawal penalties.
This method of garnering startup money worked for Dry Fly Distilling cofounders Don Poffenroth and Kent Fleischmann. They withdrew funds from their 401(k) savings because of insufficient startup funds offered by a local bank. Now, their products are sold in 19 states and several Canadian provinces. Moreover, their stock value has grown to $2 million.
Still, not everyone advocates taking this risk. “You are multiplying your risks,” Gerri Detweiler, a personal financial adviser at Credit.com, told the source.
While using retirement funds is an option, entrepreneurs thinking of undergoing business formation may not have to resort to this measure. The government is increasing startup microloan funds for community banks, and inexpensive incorporation services are also available to future business owners.