Smart Answers October 20, 2009, 10:45AM EST

Before You Use Retirement Funds for Your Startup

Instead of sinking an entire retirement savings into a new venture, make a realistic business plan and investigate other sources of funding

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I've been unemployed for four months and have six weeks of emergency savings left. I have a commercial trucking license, but no one will hire me since I haven't driven a tractor-trailer for eight years. (I was working as a field service technician during that time.) I'd like to start an independent trucking business and have $50,000 in IRAs. Should I cash in my IRAs or get an ERSOP? —K.H., Wrightstown, N.J.

Cashing out your retirement savings, or investing it in a startup venture (which is what an ERSOP—"Entrepreneur Rollover Stock Ownership Plan"—does), is inherently risky and ill-advised. If things don't work out with the trucking business, not only will you have no income, but you'll also have no life savings. While desperate people sometimes—understandably —feel they must take desperate measures, make sure you've first exhausted all other options.

Begin by thinking through your business concept thoroughly: Will you lease a truck or buy one? New or used? How much will registration, insurance, fuel, and maintenance cost monthly? Where will your customers come from? Can you get some to sign contracts now?

Put together a simple business plan, or at least a formal business outline, that realistically considers the market for your trucking service, how much business you can get, what you can charge, and what profit margin you can expect. Get help with your plan from your local Small Business Development Center or SCORE office.

Take the amount you think you need for startup, double it, and add 20%. "That's a good rule of thumb many investors use in determining how much a startup business really needs," says David Gass, founder of Business Credit Services. "If you think you need $50,000 to start the company, you probably need $120,000. If you put together a dynamite and realistic business plan, financial projections for the next three years, and have a client base ready to hire you, you might consider investing money in the company."

Rather than depleting your nest egg entirely, consider investing a smaller amount yourself and obtaining the remaining funds from one of these sources:

Friends and family. In this economy, many people's social contacts are tapped out. However, it certainly doesn't hurt to ask for investments, loans, or even for someone to co-sign a loan. "Sometimes the biggest obstacle preventing people from getting the money they need to start a new business is simply the fear of asking," says Louis R. Dienes, an attorney in the corporate group at TroyGould, a Los Angeles law firm. "Overcome this fear by carefully thinking through your business plan and explaining it in a way that convinces your investor and you that it's the right path."

Commercial lenders. Consider lenders who specialize in the trucking industry and who may lend you the money to get started with a loan secured against your truck. The U.S. Environmental Protection Agency sponsors a Web site that helps individuals find loans for the purchase of fuel-saving trucks and equipment.

Nonprofit microlenders. Many states partner with nonprofit agencies that lend small amounts (typically $25,000 or less) to startup entrepreneurs. Leslie Hoffman, vice-president of lending for ACCION New Mexico, says her group works with several independent trucking companies. "Look at microlending organizations in your area as a good possibility for funding, including ACCION USA," Hoffman says.