Most small business owners are familiar with SBA loans and conventional loans as a means for funding their businesses. However, did you know there is a wide range of SBA loan types to meet specific needs? Interestingly, in addition to SBA, conventional bank loans and investor funding, there is also a way for you to use your retirement funds to fund your business. While this may not be for everyone, this method does have its advantages, and our guest has all the information. He is Dallas Kerley, chief development officer at Benetrends Inc. He'll cover the many traditional funding options and expand on the retirement rollover funding alternative in detail.
One thing with just any investment, you want to make sure that it's a good fit and you have a reasonable expectation of getting the return.
- Dallas Kerley
It's a really important point here, we want to make sure that it's our intention to provide information that you can use. So if you've got a notepad there that would be terrific, very advisable, or just come back and make notes later on and listen to it another time. Money is indeed one of our favorite subjects here on Deal Talk. In fact it's our most favorite subject and particularly when we're discussing how you can keep and make more of it with the latter occurring when you sell your company. On this edition of Deal Talk it's all about the money and we're going to talk about financial options to help you start and grow your company, and which options may be best for certain situations. To do that I'm joined by someone who knows a heck of a lot about the subject, way more than I do. His name is Dallas Kerley, and he's the Chief Development Officer at Benetrends. Dallas, thank you so much for joining us today, good to have you.
Dallas: Thank you. I'm happy to be here, Jeff.
Jeff: I understand that there's a lot of construction going on around you, Dallas, where you guys are having a complete office makeover there. Once the jackhammer start going away and when we start hearing the nail guns in the background we may have to do something about that.
Dallas: Hopefully I've chosen a quiet spot here in the office where I'm secluded by myself now. Hopefully that won’t interfere.
Jeff: Very good, Dallas. Again, welcome, it's nice to have you on board. I was looking forward to having you. There are a lot of different options that are available out there in this day and age to help start-ups, to help seasoned business owners, folks who've been at it for a long time, get the financing that they need. But every situation is a little bit different, all needs are different. And I was hoping that we might be able to right up front touch on some of the most attractive funding options that are available. I'd like to kind of start by just ticking off a couple of maybe some scenarios that you might be able to help us kind of determine what some more of the attractive options that are available today. Let's start with start-up businesses. If I was interested Dallas Kerley in starting my own business today regardless of industry or what I'm doing, what are some of the more attractive options? And you can just give us one or two that you might recommend to first time business owners or someone who's coming in and opening a brand new company.
Dallas: Sure. I think that as far as a start-up company, that's probably the most flexible area for funding that's available. Certainly one of the tried and true ways is an SBA loan, Small Business Administration loan, and certainly that landscape has changed fairly significantly since 2008. It's much easier currently to get an SBA loan and particularly for the smaller dollar amount loans. That's always been a go-to and possibly always will be a go-to. But one of the other popular strategies that may not be as well-known is what's called a 401(k) ROBS or Rollover for Business Startups. And that process allows an individual to access their retirement fund in their IRA, 401(k), or other retirement plan to purchase a business, tax deferred and penalty free.
It's much easier currently to get an SBA loan and particularly for the smaller dollar amount loans.
Jeff: And the 401(k) or ROBS rollover, how long has that kind of been an option for people to go to? It sounds like something that's maybe hasn't been around quite as long as some of the other loans and lease options that are out there.
Dallas: It's certainly been around for more than 30 years. It’s probably become more well-known in the last 10 years. But the ERISA Code of 1974 really created provisions that provided for this structure to help small business owners. But as the SBA world tightened up in 2008, more and more individuals and entrepreneurs were really looking forward to accessing their retirement funds to fund that business because the loans were so difficult to come by.
Jeff: Very good. We're going to get into some of the details there of that particular option a little bit down the line here in the program, Dallas, so bear with us. We'll come back to this shortly. Let's go ahead and move on just a little bit. If I am interested in making capital improvements, equipment upgrades and whatnot. What are some of the more popular options or maybe the most popular option that is available now, and maybe the most attractive given current market situations.
Dallas: I think some of that depends on the dollar amount. If you're looking at a capital improvement or purchasing equipment and it's under $50,000, that would be what the SBA calls a microloan. And there's a group of specific lenders, typically non-profit that can provide that type of loan. Once you get over $50,000, say from $50,000 to $150,000, there's a special SBA program available that has simplified paperwork for the lenders that also provides a enhanced guarantee that was not available to them as recently as four years ago. Typically on that $50,000 to $150,000 loan we can get an approval in 48 hours and you can funded within 30 days. That's one option from the SBA arena. Another option of course is equipment leasing. There's programs out there that you can get $30,000 or up to $90,000 in equipment leasing. Many times outside of a leasing company the equipment manufacturers themselves often have attractive leasing options. A lot of it depends on the entrepreneur's risk tolerance, whether they want to maintain and preserve cash flow. Leasing can be a little bit more expensive if we look at the leasing factor and try to convert that to an interest rate. It can be more expensive than a loan. But typically needs less money down and the payments can often also lower as well.
Leasing can be a little bit more expensive if we look at the leasing factor and try to convert that to an interest rate.
Jeff: Is it true that in some cases you don't even have to put any money down on certain leases?
Dallas: Yeah, as far as not putting any money down that's probably true. They typically look for first month's payment, maybe first month's and last month's payment. And typically you would own the equipment at the end for a dollar buyout but you're not looking at the 10 percent to 20 percent down that you may need with an SBA loan.
Jeff: Dallas, let's say that I'm in growth mode. Sales have been amazing, my first five years, and I'm ready to expand and maybe even go into a different market. Perhaps this is something that would require maybe me purchasing some real estate. What's a good option for me in that particular case?
Dallas: I think if you're looking at a fairly capital intensive investment such as purchasing real estate or a large building, if your business is successful and you may have access to your private banker, or a banking relationship that you have. A conventional loan may be an option, if not the SBA has two programs, the 7A and the 504 loan program. The 504 program specifically addresses if there's real estate involved or heavy equipment. The 504 loan can be a little more difficult to I guess go through the bureaucratic paperwork. So you'll find many times banks are happier doing it under the 7A. An SBA would probably be the way to go in that direction. If they are all looking for a significant down payment you can access that through your capital injection from the existing business and its account. Or you could use that in conjunction with that roll over that we mentioned previously if you want to utilize some of your retirement savings in conjunction with that SBA loan.
Jeff: Dallas Kerley is the Chief Development Officer at Benetrends, Inc. and you're listening to Dallas and all of the conversation that we're having here on Deal Talk about funding options that are available to you as a business owner depending really on your particular situation. There are different ways that you can go about it and you've heard us talk about some of this here, much of those through SBA loans and a variety of those types of products that they have available to you with often times very rapid turnaround as little as 48 hours in fact you heard Dallas mention. But I do want to get back to the retirement fund option using the rollover IRA, in particular you've mentioned ROBS. Tell us a little bit about how this differs from something that is ... I guess what would you call it, self-directed IRAs. Tell us the difference between the two and why you would use the ROBS IRA.
Dallas: Sure. Great questions. I think a lot of people are familiar with the self-directed IRA because they've heard entrepreneurs utilizing that to invest in rental properties or alternative assets such as gold, real estate, car collections, and such as that. That self-directed entity can only invest in passive investments. So if you're going to be an active part of the business you can’t utilize the self-direct IRA. That structure needs to be created under the ROBS program as the IRS calls it, Rollover for Business Startup. That process is specifically designed for active business investments. So there's two types, the self-directed IRA for passive investments with ROBS program for active investment and the active business. If you can't use one in place of the other. So the self-directed IRA can't be utilized as a structure for an active business and the ROBS program cannot be utilized for a passive investment such as real estate. And it's important that you use the right structure for the right type of transaction because if you utilize the wrong structure it is a prohibited transaction and you can be subject to penalties.
If they are all looking for a significant down payment you can access that through your capital injection from the existing business and its account.
Jeff: Is this something that is available to anyone? How do I qualify for something like this, Dallas?
Dallas: Yes, the rollover for business startup is available to anyone. It's called a 401(k) ROBS that's kind of the vernacular in the industry. But having said that, just about any retirement plan other than a ROBS IRA would qualify. So if your mandatory savings plan as a government employee or 403(b) or 457, all those types of plans would qualify for the Rollover for Business Startup. Really what it comes down to is what type of investment levels that you're looking at to where the fees associated with it make sense. We typically look at if you're going to roll over $50,000 or more than there's enough of the tax savings that it might make sense to look at the rollover business startup as an alternative to just pulling the money out of the IRA or 401(k). As an example if you have a $200,000 IRA and you were to just pull the money out, and you were under 59 and a half, you would be subject to a 10 percent penalty. So you would've lost $20,000 there penalties and State and Federal income tax that probably would average close to 30 percent. So when you add the two together there a $200,000 IRA after paying the taxes and penalties of $80,000 would only leave you with $120,000. Structuring it through a ROBS program it allows you to access the entire $200,000 tax deferred and penalty deferred.
Jeff: What are the risks here to me then if I'm going through the ROBS program, on the face of it it sounds pretty good. I'm able to access the entire amount. What have been some of the objections that you have heard from prospective clients who come in Dallas to talk to you about this?
Dallas: I’m thinking the one thing with just any investment, you want to make sure that it's a good fit and you have a reasonable expectation of getting the return. I think it's within our culture that the retirement funds are your nest egg, and for cultural reasons that I don't think people look at the $100,000 in their checking account as being quite as sacred as the $100,000 in your IRA. We've had clients who if they dive in deep, they’re not going to think of one account and looking at it and saying, “The $100,000 that I have in my checking account, I've already paid taxes on that.” So it seems like nobody cares how they fund the business as long as it's successful. The main concern is what if I fail, what are the implications. If you fail with that $100,000 in your checking account you've lost that entire $100,000. If you use $100,000 in your IRA and you fail you haven't paid taxes on that $100,000 yet so eventually when you pull that out you're going to have to pay the taxes, again 30 percent. So he feels that he only lost $70,000 and the government was helping him with his business. In his words he thought it was the cheapest way to fail. It does need to be a C Corporation which some people are not as comfortable with a C Corporation as they are with an LLC or an S Corp. So there's a learning curve associated with that as well.
Jeff: Funding options to suit your needs and help you start or grow your business. I'm Jeff Allen and I'll be back with Dallas Kerley from Benetrends when Deal Talk returns in 60 seconds.
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Jeff: Welcome back to Deal Talk, I'm Jeff Allen with my guest Dallas Kerley, Chief Development Officer at Benetrends. Dallas, while we were away during the break I was kind of thinking a little bit about how a couple of different options might work together in order for me to come up with all the capital that I need for growing my business and I'm looking at adding some equipment, and maybe also too adding another small facility maybe across town or in a different market somewhere. I'm just wondering, if I've got a couple of different ways that I'm going, maybe I've got an SBA loan and I'm now considering maybe using that rollover IRA that we've talked about, retirement fund or rollover 401(k). How can I use both the ROBS and also too the small business loan together? How did those two work in conjunction with one another?
Dallas: That's a great question, and I think we're seeing more and more as people become familiar with this program, that they are being used in conjunction. Due to the tax advantage nature of retirement funds, IRA's, and 401(k)s. We see more and more people particularly from corporate America where they have the bulk of their savings in their retirement funds. So if they're looking at purchasing the business for $400,000 to $500,000 and the bank is looking for a 30 percent capital injection they may not have that $120,000 to $150,000 sitting in a checking account. But they may have it in their IRA or 401(k). So we're seeing individuals utilizing Rollover for Business Startups to get that capital injection, the $120,000 to $150,000 as the capital injection for the SBA loan. And we’ve seen that work very successfully. Banks are always focused on post-closing liquidity. So that can enhance the post-closing liquidity. And in addition to that as a level of comfort, many entrepreneurs when they're starting a business or going into a new business, are concerned about what about cash flow? How am I going to pay the mortgage, the car payment, food on the table, and smoke going up the chimney? One of the advantages of the rollover program is it allows you to take a salary from proceeds after the rollover and pay yourself a salary.
We see more and more people particularly from corporate America where they have the bulk of their savings in their retirement funds.
Jeff: That's huge.
Dallas: That's one of the risks now.
Jeff: Yeah, you bet. I think that's really, really important. And we need to clarify ROBS, Rollover for Business Startup. And I think it's really important to know that this particular program is specifically geared and available to startup businesses, correct? We don't have anything that's quite like it for those companies that are already in existence who are looking to simply grow. Is that correct?
Dallas: No, actually it can be used as a capital injection. The business that's it’s invested in there's a wide variety of structural changes that may or may not be need to be made depended on how it's organized but it can be used to inject cash in existing businesses.
Jeff: Okay, very good. That's really important indeed. I want to take just a step back. I'm thinking that as a business owner myself that at some point in time I'm going to be going in and talking to my SBA loan representative no matter where that might be, and Dallas that could be you for that matter. But I need to come up with that 20 percent or 30 percent down in order to feel more comfortable with the process. I need to find out how I can obtain that down. What are some good ideas or some ways, some suggestions that you have for those business owners who are looking for ways to come up with that 20 percent to 30 percent, they just don't have it.
Dallas: Yeah, that's often one of the major hurdles that an entrepreneur has to overcome. We talked about the ability to look at your retirement funds for those funds. Another possibility is a security back loan. If an individual has a stock portfolio out of a retirement plan rather than sell stock which many times they’re reticent to do because that will generate capital gains. They can access and really treat that almost like a home equity loan, although instead of using equity in the home they're using the equity in their investment portfolio. So they can borrow against that portfolio, typically if it’s a stock portfolio, it's a 70 percent loan to value. So as an example if an individual has a $100,000 portfolio they could borrow $70,000 against that. The interest rates are typically less than an SBA loan, right now they're around 4 percent. All the stocks remain in your name. You still retain all the appreciation, all the dividends from your portfolio and you're not required to sell and generate capital gains. So it enables you to keep your investment portfolio intact, just use that as collateral for this loan. You're seeing that as another way to come up with that capital injection for an SBA loan.
We talked about the ability to look at your retirement funds for those funds. Another possibility is a security back loan.
Jeff: Certainly the advantage going back to the discussion of the ROBS idea is fantastic. And you get access to the entire amount in your account, if that is in fact what you're interested in without having to worry about paying taxes. Am I going to have to pay taxes down the line on any of that money even if I sell my business off or if I make a go of it, I just can’t make it, I just dissolve everything? Am I going to have to pay taxes eventually in any case on that, Dallas?
Dallas: Let's take a look at this ... I think the way to best understand this, is investing in your business is just like investing in Yahoo, Microsoft, or eBay. If you're successful, as if you had invested in Google and your business is wildly successful, and you sell it as a stock sale, those proceeds would go back into your retirement plan just as if you sold Microsoft for a profit. There's no taxes due that way. However, like any retirement plan if at seventy and a half you start to move the money out you pay the taxes just as you would any other IRA or 401(k) at that point. So there are no taxes due on the transaction at the time of sale. If you're unsuccessful which I think was the other portion of your question...
Dallas: And you invested a $100,000 and the business goes bankrupt, it's just as if I get, for lack of a better word you pull an ENRON and it went bankrupt. You don't have to pay it back. It was just a bad investment just like you bought a stock that went bankrupt. Or if you sold it at a loss, whatever proceeds are, they’re going to go back into the retirement plan. So you invested $100,000 and you sold your business and only received $50,000, the $50,000 will go back into your retirement plan and you just have a $50,000 loss. So there are no penalties or excised taxes due if you're unsuccessful.
Jeff: That sounds like a really outstanding plan for those who may have obviously that kind of money in their retirement accounts that they can take a look at, but I'm kind of wondering about the process in terms of being that is something that is easy to go ahead and turn around and take care of. It sounds like on the face of it, it would be something that would be pretty easy to do that there's not really anything to qualify for because if you've got a retirement account, and it's one of the qualifying accounts that is, and you've kind of outlined that a little earlier, it would be pretty easy to access those funds, is that correct?
Dallas: Yeah. Typically that entire process takes from start to finish two to three weeks. I guess the wildcards on the timing are how long it takes to incorporate in your particular state and where your account is currently in custody, how long it takes them to release the funds to roll it over into the new retirement plan. It may be helpful to step back and talk about the process. While it is a pretty simple process you just want to make sure that you're working with somebody who has experiencing in doing it because really the devil is in the detail. But essentially we would create a corporation for you. That corporation in turn would sponsor a new retirement plan. That retirement plan, once established we would roll your existing IRA or 401(k) into that new retirement plan. But because it's going from one retirement plan to another retirement plan there are no taxes and penalties to it. Once your funds are in the new retirement plan, instead of buying stock in Yahoo, Google, or eBay, you elect to buy stock in your parent corporation. That corporation from the sale of the stock now has the money to purchase and do business, or inject cash in existing business.
That corporation from the sale of the stock now has the money to purchase and do business, or inject cash in existing business.
Jeff: Those are outstanding points that you've made and it really does help to kind of clarify the steps that are required and the process in fact two to three weeks is not long at all. I think that the important point here to mention in case people have kind of stood up, or sat forward, and taken notice of what we've talked about. The one thing it is clear though that we need to mention that you must be in fact a C Corp or you must certainly get yourself involved in the process of becoming incorporated as a C Corp in order to take advantage.
Dallas: That's correct, and I think when we mention C Corp I think the one thing that people are concerned about is double taxation. And particularly if they talk to their accountant. Accountants are certainly, probably more comfortable and more often than not worked with an S Corp or an LLC. The one differentiator to keep in mind is this structure is for closely held C Corps and organizations. The double taxation on the profits are typically either avoided altogether and mitigated by taking a larger salary, paying dividends back to the retirement plan or bonuses to yourself. Very rarely do we ever see double taxation in these types of structures.
Jeff: Dallas Kerley, if we've got some folks who are listening to the program right now who have questions. They'd like to get in touch with you at your office. What is the best way that they can do that?
Dallas: We have a great website that actually dives into details about the processes, SBA loans, and a variety of different funding solutions. And that's at benetrends.com, and all our contact information is there. We have a terrific video that kind of walks step-by-step through the rollover process. There's a funding module there where people can explore how much money they need to start a business, the various rent levels, how much they want to have as working capital. A variety of different tools for the small business owner looking for funding.
I think the one thing that people are concerned about is double taxation.
Jeff: Dallas is someone who is highly recognized and really renowned across the country for his level of expertise in all these areas and all these options that we've discussed. I know Dallas you’ve had a number of things that have been published in various financial types of periodicals and certainly online. I do want to thank you very much for taking time out of your schedule today to chat with us just a little bit about some of these things, and of course in particular the option that we talked about. Utilizing retirement funds to help to grow our businesses and to help in fact get them off the ground. I sure do appreciate it. Perhaps we can have you back on Deal Talk again.
Dallas: I would look forward to it and I appreciate the opportunity.
Jeff: That's Dallas Kerley, Chief Development Officer at Benetrends is our guest today on Deal Talk.
Deal Talk, of course, presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts make sure to join us again here on Deal Talk. I'm Jeff Allen. Thanks again for listening. We'll talk to you again soon.