StartupJournal.com reports today that the Employee Retirement Income Security Act allows potential franchisees with limited liquid savings to start a franchise without outside help, according to a new report published by StartupJournal.com, The Wall Street Journal’s guide for entrepreneurs.

“The Employee Retirement Income Security Act of 1974 (ERISA) allows investors to control their IRA and 401(k) retirement savings, in contrast to a traditional pension plan,” said David Patton, managing editor,
StartupJournal.com. “Even if you’re borrowing most of the money to finance a franchise, the Small Business Administration (SBA), the guarantor of most small business loans, expects you to make a hefty down payment, and you can use your retirement accounts for that purpose.”

Using retirement funds to purchase franchises has become a more popular option since 2001, when the dot-com bubble burst and made stocks less attractive, said StartupJournal.com’s report. Besides investing in stocks, bonds or mutual funds, you can choose to put retirement savings, which is excluded from taxes, toward financing your own business. When you sell the business, the proceeds are placed back into a qualified retirement plan. One alternative to using your retirement money is taking out a home-equity loan, said StartupJournal.com.”

“However, if your franchise fails, you could lose your house. The pros of financing a franchise with retirement-plan savings include: by using your 401(k) instead of borrowing money, you have no debt service and the initial capital you generate can be put right back into the business; you can control your own destiny; using a hefty retirement account allows you to buy a more expensive franchise than you could otherwise afford.”

“The cons of financing a franchise with retirement-plan savings include: there is the risk you could lose your nest egg; and you must operate the franchise yourself and set it up as a C Corporation, a format that can generate serious tax problems when you want to sell your franchise or retire.”

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