How to Use Your 401K to Save Your Business

Financing is still tough for many small businesses and Wall Street is too busy paying themselves bonuses rather than expanding their business lending. Customers are taking longer to pay and your bills may be piling up. How can you meet your cash needs?

After you have exhausted your traditional options of financing from banks and credit cards you may want to consider a risky, but very good if done correctly, way of paying your bills in the downturn: Use Your 401K.

Borrowing from your 401K can be helpful in two situations:

1. If you have a self-directed 401K, you can do a rollover as business startup to invest in or buy a new business. In esscense, instead of investing in a mutual fund that invests in someone elses business, you are investing in your own business. However, the risk here is that if your business fails you will lose the money you took out but most likely do not have to pay it back.

2. If you need cash temporarily such as to pay employees while your are awaiting a major payment from a customer, you can actually borrow from your IRA without any penalities as long as you put the money back within 60 days. This can be very convenient if you are sure that your customer will pay you or you know that you will be able to repay the money. Otherwise, you will incur the 10% penalty and must payback what you borrowed.

Even if you do not want to borrow from your 401K, you should at least make sure that your plans has these options in case you ever need them.

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The entire article from CNN can be found here.