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  • Startup Financing: What You Need to Know

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    Downsides to Borrowing from Your 401(k) to Fund Your Business

    A potential source of short-term or emergency funding for your business might be a loan from your or your spouse’s 401(k) retirement plan—if the plan has a loan provision in place.

    If you can take loans with your plan, be sure to read the fine print to know what you’re getting into, and consider these two factors:

    • If you drain your retirement funds for your business, and your business doesn’t make it, what will you have for retirement?
    • The advantage of a 401(k) is the tax-advantaged growth of assets. If you borrow from the plan, you’ll lose potential growth.

    In the long run, a low-interest loan from a bank or other financial institution might actually prove to be a more viable option.

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    • To find out whether your 401(k) has a loan provision, check with your employer or plan administrator.
    • Visit the IRS website for more information on borrowing from 401(k) plans.
    • According to the 2014 Small Business Success Study, while 31% of small business owners have used commercial sources such as bank loans, bank credit lines or SBA loans to fund their businesses in the past year, 36% have used personal sources (i.e., non-retirement savings, retirement savings, such as their 401K, or capital from family and friends). Learn more about the study here.