A lot of new small business owners often dip into their retirement accounts or life savings to fund their new venture. But cashing out a retirement account, especially a taxable one like a 401(k), can sabotage the success of your business.
Avoid Using Savings to Fund a Business
For starters, you forfeit any future savings on money you’ve already set aside for use during your retirement years. What will you do later in life? You may not physically be able to work during your retirement years, so don’t depend on the fact that you can simply continue working at a job to produce an income.
Another reason to avoid taking out your life savings to fund a business is because it will likely come with high taxes and penalty charges. If you withdraw money from a 401(k), or traditional IRA, you’ll have to pay upwards of 40% in taxes and early withdrawal penalty fees. That’s not a smart way to start out a new business.
Finally, you’ll be losing out on extra tax benefits, like credits and deductions, that can be added to your tax return each year. You would also be missing out on any contributions from your employer if they offer to match your funds.
For all of these reasons, you should avoid touching your savings and retirement accounts as much as possible. Here are three smarter ways for funding a new business venture without using savings.
1. Bootstrap Your Idea
The grassroots style of marketing and funding a new business venture is a popular method that’s been around for a long time. Basically, you use the connections and community you’ve already built as a way to help spread your idea or mission.
The marketing is all done via word-of-mouth and you reach out to people individually to explain what you and your business do. The idea grows slowly and any money that it brings in is reinvested into the business. This will build a solid foundation while allowing you to keep more of your money in savings.
2. Consider Crowdfunding
Crowdfunding sites, like Kickstarter and Indiegogo, are becoming more and more popular because it leverages a huge audience of people and gives them the opportunity to invest in your business idea. Most small businesses don’t succeed because they don’t have the capital they need, but instead of pulling the funds out of savings, you can use crowdfunding to turn your business dream into a reality.
Whether it’s a interchangeable watch, a productivity planner, or an alarm clock that monitors your sleep, these sites have built a platform that allows you to share and fund your unique idea. And the best part is that you’ll already have hundreds (and in some cases, thousands) of raving fans and customers who are ready to buy and spread the word.
3. Enter a Contest
Another route you can take to infuse your new business venture with cash is by entering a small business contest. For example, Chase gives away $2 million annually ($100k each to 20 small businesses) through its Mission Mainstreet grants program.
MIT offers a 100K Entrepreneurship Competition where small business owners can pitch their ideas and have the chance to win much-needed funds to get started. Once your business idea is vetted and you create a business plan, you could win up to $100,000 to go towards your venture.
Amazon similarly offers startups the chance to find funding, grow at a smart rate, and find resources for marketing, all for free. They’ve helped sites like Pinterest, Etsy, and Airbnb get their starts. So if you have a software-based business, or one that sells physical products, they can help connect you to the resources you need, for free.
Are you thinking of starting a business? What are some other ways to fund it without using savings?