5 Reasons to Choose Solo 401k Loans for Your Business
“Business is a combination of war and sport.”
~Andre Maurois
There are many similarities between both business and war starting with the adrenaline rush, strategic planning, and determining the right time for action. However, the most important of these similarities is the need of financial resources and its limited availability poses much greater challenges in front of small business owners. If you are a small business owner or self-employed individual, Solo 401k loans offer an alternate mean of funding. Solo 401k retirement plans allow participant loans of up to 50% of the available account balance to a maximum limit of $50,000. The loan is not considered as an early withdrawal or distribution, exempting it from penalties or taxes, while offering low-interest funding to the participant.
What makes Solo 401k loans a sensible choice for business owners?
- Forget credit check: Being a small business owner or self-employed individual is difficult because of the workload, stress, and management problems that you face. Asking for credit score before lending might further limit credit availability, thereby creating hostile business environment for you. Solo 401k loans do not require a credit check and being the plan owner or participant, you won’t be seeking consent from anyone whatsoever.
- Lower interest rates: You need credit availability and at a cheap rate. Solo 401k loans are available at lower interest rates, usually prime rate plus 1%, against similar credit programs. For an instance, you will pay interest of up to 6.5% for a SBA 7a loan between $25,000 and $50,000, with a repayment term of less than seven years.
- No restrictions on usage: Unlike traditional funding loans, like SBA 7a loan, you do not need to mention a purpose of use for the loan. It can be used for the repayment of an existing loan, investing, business expansion, and even to accommodate personal requirements.
- Interest paid goes to Solo 401k plan: Borrowing from a third-party lender would require you to make interest payments to the lender, whereas a Solo 401k loan redirects the interest to your plan itself, minimizing outflow of money.
- Zero penalties: The IRS classifies it as a loan and not a distribution, exempting you from penalties. Only if you fail to repay the loan, it would be considered a distribution and withdrawal penalty may apply. A distribution before 59 ½ years costs a withdrawal penalty of 10% along with annual taxes calculated on the amount.
Solo 401k loans can offer stable credit facility for small business owners and comes with flexible repayment terms. You need a minimum of one quarterly payment along with repayment term of five years, allowing you to survive through financial difficulties.