Here are some tips on how to finance a franchise: With some maneuvering, use your 401(k) as seed money

Photo courtesy of GeorgeHH, via Wikimedia Commons.

Even though the economy seems to be inching its way toward recovery, banks are still tight-fisted with the precious small business loans entrepreneurs need to get started.

The locked vault doors have prevented many prospective Planet Beach franchise owners from realizing their goals. But there are ways to get around the lack of loans.

First, if you haven’t already read our blog post about our partnership with BoeFly.com, take a look. It will show you how to find banks that are willing to lend by submitting your information to hundreds of them at once.

But here’s a secret: You might not need a bank to secure financing.

“Most people don’t realize that they can use their retirement funds to finance a small business,” said David Mesa, vice president for international development for Planet Beach. “There are a few things you need to do to pull it off, but you can use your 401(k) as seed money without paying any taxes or penalties.”

You’ll need a tax lawyer or accountant to walk you through the process, because it gets a little tricky.

Here’s a basic step-by-step outline:

• You form a C corporation, which creates its own 401(k) plan.

• The corporation’s employees (at first, just you) must then be allowed to buy stock.

• You roll over your existing retirement funds into the new corporation’s 401(k).

• You use the new 401(k) plan to purchase all of the company’s stock. At this point, you have full control of the company, your 401(k) has been converted into working capital and you have avoided any tax penalties.

Business profits can be reinvested back into the company’s 401(k) plan, allowing you to refill your retirement coffers.

Planet Beach works with Guidant Financial to help potential franchisees execute 401(k) rollovers. Guidant has been a leader in 401(k) rollover financing since 2003, and its iFinance plan simplifies the process.

Younger entrepreneurs may not have big 401(k) accounts to tap — but families can take advantage of the same strategy to help their children start businesses.

“We had one franchisee who didn’t have a large enough 401(k) to finance the investment himself, but his parents were able to use their 401(k) to help,” Mesa said. “The parents are 10 years away from retirement, and he’ll be able to pay back their retirement tax-free. It’s a great solution.”

To find out more about financing a Planet Beach, and how we’re recreating the day spa industry, visit us at www.myplanetbeachfranchise.com. You can download a free franchise report at the upper left or sign up for a virtual seminar at the bottom right.