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Old 03-07-2008, 10:48 AM
 
Location: Grafton, Ohio
286 posts, read 1,507,384 times
Reputation: 164

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My family and I are looking into a business start up. My father in law in the main financial investor.

We need liquid capital of about $75K. We currently have available $14K through the remaining balance of a home equity loan. Once we have proof of at least $45k in our possession, we have access to a $255K business loan that will fund the project completely.

My FIL has 240K in his 401k, but it seems very difficult to obtain. From the sounds of it, he has to prove hardship, can only get 50K, and has to pay immediate taxes on it, payback in 5 yrs at 9.5%

He also has a life insurance policy for himself and his wife, both worth 150K, and both have been paid into over a very long period of time.

I doubt he'll be eligible to get his home equity loan amount increased. Aside from the equity loan, his original mortgage is only 7 yrs away from payoff, and his equity loan out is about $40K; appraised value of the house is $110K.

From this scenerio, what are his options to obtain the finances he needs? How would he go about it. My FIL does have excellent credit and a very good credit score, so securing the business loan should not be an issue but the bank wants to see him with 45K available funds.

Thoughts?
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Old 03-07-2008, 11:10 AM
 
2,775 posts, read 3,162,846 times
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Great question and one I hope to hear from others about as I am starting up my own business and although I do not need outside investment right now, it will be an avenue I will pursue down the road to help facilitate expansion.

I have looked into borrowing against one's 401k... What you've stated regarding the high percentage rate and proving hardship doesn't seem like anything I've read before. The tax penalty and the terms of payback, yes... but the other items not at all. I read that the percentage was usually based upon the prime rate (or just a bit higher). If so 9.5% seems unusual. Additionally, I know of someone who borrowed from their 401k to purchase an engagement ring... he didn't have to prove hardship at all. It was just a loan application that he filled out online. All that said, perhaps the holder of your FIL's 401k has unique requirements.

If you cannot identify any other private investors to front the money (friends or family), then indeed alternatives might not exist. I happen to have low interest <9.5%) lines of credit via my financial institution... is that something he could apply for or tap into? Or credit cards with great terms? Are there any assets which can be sold or borrowed against?

Since the liquid requirement is for a substantial loan, I bet borrowing against another loan might impact your ability to get the large one. This could be a situation where your FIL needs to wait a while and save up some more cash (or try to network with some potential investors).
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Old 03-07-2008, 01:24 PM
 
12,692 posts, read 18,422,728 times
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Don't mess with your 401(K). Its there for retirement, so retire on it.
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Old 03-07-2008, 02:37 PM
 
Location: Grafton, Ohio
286 posts, read 1,507,384 times
Reputation: 164
Quote:
Originally Posted by Moth View Post
Don't mess with your 401(K). Its there for retirement, so retire on it.
I agree to a point, but this is my FIL's decision. If he can use it to invest into a proven business that gets off the ground, he sees it as a sound investment rather than borrowing and hoping it works. It is not different than taking the money and investing it, only this would be his own personal investment rather than throwing it towards something else. Things can go good or bad in either case, and he is willing to take a chance.
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Old 03-07-2008, 02:38 PM
 
Location: Grafton, Ohio
286 posts, read 1,507,384 times
Reputation: 164
Question New question

Has anyone ever heard of setting up a 501(a) or Entrepreneur Rollover Stock Ownerhsip Plan?
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Old 03-07-2008, 02:56 PM
 
12,692 posts, read 18,422,728 times
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Quote:
Originally Posted by bubbagirl View Post
I agree to a point, but this is my FIL's decision. If he can use it to invest into a proven business that gets off the ground, he sees it as a sound investment rather than borrowing and hoping it works. It is not different than taking the money and investing it, only this would be his own personal investment rather than throwing it towards something else. Things can go good or bad in either case, and he is willing to take a chance.
Well, not to belabor the point as it is your decision. But first you describe it as a "proven business" but then go on to use "good or bad" and "take a chance."

I admire the guts to take a chance. Hey, that's what built this country and will continue to do so. But I just would not use my 401K. You will lose 20% to taxes if you cash it out.

But, just my opinion. Best of luck.
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Old 03-07-2008, 03:16 PM
 
Location: Grafton, Ohio
286 posts, read 1,507,384 times
Reputation: 164
I understand what you're saying, Moth. As for it being a "proven" business, well it is a franchise that is doing exceptionally well. The corporate office has an incredible team and are certainly in the business of good business. Of all opened locations, there has only been one failure in the company's history which was a result of poor owner-manager. This particular franchise is still developing in the area we are aiming for, and the current locations are doing incredibly well. So yes, I would consider it a proven business.

As for referring to "good or bad" or "taking a chance," those were words I specifically chose because all too often people look at a new business ventures as risky business, and I certainly am not going to depict myself as naive on that fact. My FIL recently lost quite a bit on his 401k because he didn't have his investments right .. just goes to show that keeping it invested in traditional ways can be just as risky as opening a new small business.
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Old 03-07-2008, 03:23 PM
 
2,775 posts, read 3,162,846 times
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Historically all Entrepreneurs - successful ones, take risks. I wouldn't ever recommend to a new one "don't take a chance" because I know better. I know that people who don't have the guts nor entrepreneurial instincts say that all too often to those who do have what it takes. Instead, I'll just suggest that your FIL continue reaching out to potential investors so as to really investigate options before making the decision to loan against his 401k. Since the stock market isn't producing hot returns for anyone right now, I suspect there are quite a few people with a lot of money looking for something to give them a decent return... now is thus the time to probably identify a good Angel investor willing to just be a silent partner for a decent rate of return on a short-term loan for an established and successful business model. Seriously, since this is a turn-key business opportunity, I'm sure someone out there would be willing to invest a little cash into it. There are websites and organizations who help match investors with people seeking money for their business, I recommend searching them out. If you don't ask, you'll never know.
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Old 03-08-2008, 11:27 PM
 
Location: TN
15 posts, read 47,699 times
Reputation: 10
Are you the first owner of this location or are you buying it from someone that bought it from the original franchise? If you dealing with the latter, try and get the owner to carry the note - it is normal for the buyer to put about 40% cash down and have the seller finance the balance (with interest). Also, research the franchise fees and requirements as they may have changed since the original agreement.
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Old 03-09-2008, 07:27 PM
 
3,698 posts, read 10,509,743 times
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You shouldn't put your family's finances at risk for this. Taking money out of retirement and life insurance is the wrong road to go down, and imagine having Thanksgiving dinner at the in-laws when the business has turned sour and dad is wearing a blue vest saying hi to folks when they walk through the door at Walmart.
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