Of all the bonehead ideas in the world using your 401k money to put a down payment on the business is the stupidest. Yet the mainstream sites and programs to put you into this mess abound. It is much the same thing as leveraging up your house or pledging it to the SBA for the same deal. Except for two little problems: your house was never sheltered from creditors the way your 401k is. And your 401k hasn’t been taxed yet. So if you borrowed against it and the deal turns out to be bad, not only would you lose your investment, you would have a tax bill on top of it.
Folks, here me loud and clear. When you buy a business cash is precious, you must save every penny of your cash. There is never enough cash around when buying a business. But do not be tempted to raid your retirement account to do it. There are lots of places to get investor cash and the 401k is the easy way out. It is also the fools way. The same can be said for leveraging your house. When the SBA says it wants your house, say no to the SBA. It’s a fools game. You can go a notch higher in deal size, raise a little capital and save all that aggravation and sleep at night. Remember, no money down deals can be hard to do but they can save your bacon many times over. If its your first deal, take on partners if you have to, take on investors, but do not plunk down your life savings on a business.
