Small Business Owners
What’s Your Niche?
Rob Horken — owner of Rob’s Rod Repair and Custom-Built Fishing Rods — supplements his retirement income by building custom-made fishing rods. An avid lifelong fisherman in East Grand Forks, Minnesota, Rob’s rods are like individual works of art. They have become a popular choice in his local area as birthday, holiday and graduation gifts.1
Have you ever thought of starting up your own business venture? The perks can be pretty satisfying. Rather than constantly battle the corporate structure, there is no age discrimination when you are your own boss.
Since 2000, the baby-boom population has been gradually retiring, contributing to a steady increase in self-employment. In fact, so many 50-plus boomers have started their own businesses that the trend is called “olderpreneurs.”2
Interestingly, women comprise 40 percent of new entrepreneurs in the U.S. Some experts say that women older than 50 who launch their own businesses actually have more advantages than younger women. Once their children are grown, older women often are motivated to repurpose their time and energy into a new project.3
Whether launching a vegan food truck or an independent bookstore, many older workers are investing their passion, experience and money into a new venture designed to keep them busy and fulfilled throughout retirement years.
1 Brad Dokken. Brainerd Dispatch. May 27, 2018. “Northwest Minn. man finds retirement niche building custom fishing rods.” https://www.brainerddispatch.com/sports/outdoors/4452067-northwest-minn-man-finds-retirement-niche-building-custom-fishing-rods. Accessed June 18, 2018.
2 Lisa Bobulinski Bixler. Prime Women. Nov. 3, 2017. “Olderpreneurs: Blending Wisdom, Inspiration and Quality of Life.” https://primewomen.com/second-acts/career-transition/olderpreneurs/. Accessed July 5, 2018.
3 Kerry Hannon. Forbes. Oct. 5, 2017. “Why Women Entrepreneurs Over 50 Hold The Aces.” https://www.forbes.com/sites/nextavenue/2017/10/05/why-women-entrepreneurs-over-50-hold-the-aces/#578ac7561561. Accessed June 18, 2018.
Money Saving Tips
Small Business Start-Up Considerations
Every new venture needs capital to pay for initial start-up costs that range from materials, production and inventory to management software and marketing materials. According to a recent Federal Reserve survey, only 40 percent of small-business applicants are awarded the full amount of financing they request.1
For people considering launching a new venture, it’s a good idea to consider all possible sources of capital. To avoid taking on a traditional business loan, some entrepreneurs look at alternative sources of funding such as credit cards or home equity. Those considering taking a “loan” from credit cards should be aware that some personal credit cards have more generous promotional offers than small-business cards. Also, if the venture requires travel, one consideration could be using a credit card with rich bonus rewards that can be used to help defray the cost of business trips.2
However, it’s important to recognize that interest rates can be high, and may climb higher as the Fed raises interest rates. Presently, the average credit card interest rate is 16.92 percent.3 Large credit card balances can lower an individual’s credit score, making it more difficult to get a low-interest loan from traditional lenders down the road.
As for home equity, there are two options for using a primary residence as collateral:4
- Home-equity loan — borrow a lump sum and make fixed monthly payments until the loan is paid off
- Home equity line of credit — access a revolving line of credit and pay a variable interest rate on the money withdrawn (note that because the rate is variable, the payments could rise over time)
There are two important caveats to consider with home equity. First, defaulting on payments puts the house used for collateral at risk of forfeiture.5 Second, the interest paid on home equity funds used to provide business capital is not tax-deductible.6
A recent survey found that more than a third of business owners turn to friends and family to borrow money for their business. Rather than ask them for a loan, budding entrepreneurs could ask them to invest. This funding model technically makes loved ones part-owners in the business, which may motivate them to be both supportive and willing to help out since they have a vested interest in the success of the business.7
And finally, one of the perks of 401(k) plans over a pension is the penalty-free access to retirement funds after age 59½.8 Individuals should consult with a financial advisor to get a complete financial picture before considering using retirement funds to start a business.
Neither our firm nor its agents or representatives may give tax or legal advice. Be sure to speak with a qualified professional about your unique situation.
1 Tamara E. Holmes. USA Today. April 30, 2018. “Borrower beware: Financing a small business with your own money is tricky.” https://www.usatoday.com/story/money/business/small-business-central/2018/04/30/small-business-week-2018-borrowing/544711002/. Accessed June 18, 2018.
3 Kelly Dilworth. CreditCards.com. July 5, 2018. “Rate survey: Average card credit card rate climbs to all-time high of 16.92 percent.” https://www.creditcards.com/credit-card-news/rate-report.php. Accessed July 6, 2018.
4 Tamara E. Holmes. USA Today. April 30, 2018. “Borrower beware: Financing a small business with your own money is tricky.” https://www.usatoday.com/story/money/business/small-business-central/2018/04/30/small-business-week-2018-borrowing/544711002/. Accessed June 18, 2018.
6 Kenneth R. Harney. The Washington Post. March 7, 2018. “IRS issues do’s and don’ts for deducting interest on home-equity borrowing.” https://www.washingtonpost.com/realestate/irs-issues-dos-and-donts-for-deducting-interest-on-home-equity-borrowing/2018/03/06/6660a892-20b2-11e8-86f6-54bfff693d2b_story.html?noredirect=on&utm_term=.baecdeee93e7. Accessed July 5, 2018.
7 Tamara E. Holmes. USA Today. April 30, 2018. “Borrower beware: Financing a small business with your own money is tricky.” https://www.usatoday.com/story/money/business/small-business-central/2018/04/30/small-business-week-2018-borrowing/544711002/. Accessed June 18, 2018.
Helping Small-Business Owners Save for Retirement
While self-employed entrepreneurs may not receive an employer match, many retirement plans permit a small business to make contributions in addition to the owner’s individual contributions. These annual contributions can be significantly higher than that of an employer-sponsored 401(k):1
- SIMPLE IRA — Net earnings from self-employment, up to $12,500, plus an additional $3,000 if you’re 50 or older, plus either a 2% fixed contribution or a 3% matching contribution
- SEP IRA — 25% of your net earnings from self-employment (not including contributions for yourself), up to $55,000
- Profit Sharing Plan — Up to 25% of compensation (not including contributions for yourself) or $55,000
- Individual 401(k) — Annual salary deferrals up to $18,500 (plus an additional $6,000 if you’re 50 or older); contribute up to an additional 25% of your net earnings from self-employment for total contributions of $55,000
Be aware that contributions for each plan are subject to certain criteria.2
Neither our firm nor its agents or representatives may give tax advice. Be sure to speak with a qualified professional about your unique situation.