Hey guys Sean Mory and Dustin Weitzell joining you for another session of LenCred Credit Geek Q&A. Today we will be talking about 401k for small business startup. Dustin you want to start on this one. I will start off and then kick it back to you because I know you use to deal a lot in that space. I think it is first and foremost important to like we have said on previous videos but to know all your options. 401k can always be a great option because that money, that is your savings, but remember that is everything you have.
So if you are going to use it for an acquisition or a down payment for other type of financing and those things that my be great. If you are only looking for smaller dollar amounts then maybe you can get though a different vehicle and still keep that safe, you always have that as a backup. So that is what I always talk to my client’s when they say I think pretty much want to go that direction, we just go ahead say what if we can do it in this way then you can keep that 401k if you need it and in the meantime still be using what you have. I will give it back to you on that.
Well something that you said that again just always rings a bell with me is, even in my earlier days as an advisor, something that I always said was get business credit first, get personal credit second. Back up to your back up. You do not want to use your personal cash unless you have no other option. Your 401k especially if you just pull it yourself, you are going to pay penalties on it. There are companies out there that will help you convert your 401k over into your company. I am not going to go into that today. I want to make sure that we stay focused on utilization of this type of product but, what is important to know here is this is going to be specific things.
You are not going to want to use this for anything and everything that is out there. Just because you may have $150,000 to $200,000 in your 401k, does not mean you need to tap into all of it. You can use that for down payment money for an SBA Loan, to show liquidity, for franchise purchasing it is one of the most popular things to do because you can pay that lump some for the franchise but then you are always going to need working capital at that point. So relying on just your cash and just your 401k that hard earned savings and retirement isnt always going to be your best option, though it maybe your easiest.
I had a client that start their business with their own cash; I have talked about it before, had 800+ FICO Score, they had a great business model, had over 2 million in revenue if I remember. Went to borrow 5 to 10 years into the business, they could not because they never established any business credit. That is a whole other topic. (Chuckles) you are telling me! On that point Dustin, can you give everyone out there an example of a good 401k utilization situation that you have ran into.
It all comes back to what we are talking about. There is not one that stands out but there have been times where people knew that was their best option so they thought until they realized there are other options. My one client about three weeks ago want to buy the business for $100,000 they only need to actually have $50,000 then the rest were other fees that were associated that the franchise wanted them to have on hand.
Although I got them in for as little as the $50,000 instead of the $100,000 then we got the rest in a different financing vehicle like credit cards and a small business loan. instead of taking all their money out they still have that as a back up and we were able to pull that money from other places. Originally they said that they just wanted to do it the 401k way because that is what they were told to do! Again the more education you have the better decision you can make.
In the nut shell there for everyone that is not a credit nerd. They used part of their 401k instead of leveraging all of it and then Dustin helped them get into some working capital that is going to help them establish business credit and create some really cash flow friendly financing. Using the correct financial vehicle for the correct meaning. With that being said I hope it helps answer some of your guys questions wondering about 401k and when to utilize them. Thank you for joining Dustin and I for another session of LenCred Credit Geek Q&A.