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Next Avenue: How to manage the financial risk of starting a business after 50

This article is reprinted by permission from NextAvenue.org. It is part of the America’s Entrepreneurs Special Report.

Transitioning from your nine-to-five career to becoming a business owner after 50 may sound enticing, with the freedom to set your own hours and profit from your passions. But midlife entrepreneurship comes with financial risks, too. Here’s how to manage them and set yourself up for success:

Be mindful of your financial commitment

Since you’ll need to continue saving for retirement or live on your current fixed income in retirement, it’s crucial to establish a budget for how much you can, and will, invest in your business. Ask yourself these questions:

  • How much money am I able to invest without taking on debt?
  • How much revenue do I need to be profitable?
  • What other financial commitments and expenses do I have? (e.g. insurance, mortgage, utilities, travel)

You may need to dig into your financial statements and do some research to get these answers. But putting in the time to do so will help prevent you from endangering your financial future. And before starting a business, get your debt paid off, says Chane Steiner, CEO of the personal finance site Crediful.

5 funding ideas for a midlife business

Once you’ve determined your monetary limits, consider the five funding ideas Business.com recommends: Bootstrapping, personal loans, government or venture capital, crowdsourcing and retirement accounts.

Bootstrapping: If you own the right equipment and have the knowledge to launch your business without help, use your own capital for initial costs. Just bear in mind that doing so will likely limit your financial ability to hire employees or invest in marketing.

Says Rob Stephens, founder of CFO Perspective, a small business advisory site: “The question I would ask is ‘How much money can you lose and still live the retirement you want to live?’

Steiner suggests leaving “six months’ worth of expenses in savings, in case things tank.”

Personal loans: If you need money to buy materials, hire staff or contractors, or pay for advertising, borrow funds with a personal business loan. It will most likely have a lower interest rate than if you charged the expenses on a credit card.

These days, the rate for a personal business loan is often 4% to 6%, according to the ValuePenguin personal finance site. By contrast, the average credit card rate is about 17%.

Don’t miss: Why are so many people over 55 going bankrupt?

Government or venture capital: The U.S. Small Business Administration (SBA) offers two ways to get a loan: federal lending institutions and venture capitalists.

The SBA’s free Lender Match program connects small-business owners with SBA-approved lenders. Or you can find a private investor through the SBA’s Small Business Investment Companies network.

Crowdfunding: Websites like Indiegogo, Kickstarter and GoFundMe make it easy to generate awareness for a business idea and turn public interest into financial support.

You can use crowdfunding platforms to create an online fundraiser and then share the crowdfunding campaign link with family members and friends through email, social media and virtual marketplaces such as Craigslist to drive donations.

Retirement accounts: While borrowing against funds in your 401(k) should be a last resort, it can provide more control of your money than working with a lending institution.

And you can transfer funds from a personal retirement account into a new 401(k) formed specifically for the business. This avoids extra debt and tax penalties, but it could also risk your savings. So, talk to a financial adviser if you are considering this route.

Read: It’s going to be easier to make early 401(k) withdrawals, but should you do it?

Kenny Rose, founder and CEO of Semfia, an investment advisory firm, says Rollover for Business Startups (ROBS) can be one way to jump-start yourself. ROBS “allows you to do a partial rollover from a retirement account as your cash injection to get your business started — tax-free and penalty-free,” he says.

The ROBs strategy, Rose adds, can let you use pretax funds, avoid eating into your savings and invest in your next career.

There are substantial risks with ROBS, though, which the Internal Revenue Service explains in detail in its article on IRS.gov about the Rollovers as Business Startups Insurance project.

The IRS site says: ROBS plans, while not considered an abusive tax avoidance transaction, are questionable because they may solely benefit one individual — the individual who rolls over his or her existing retirement funds to the ROBS plan in a tax-free transaction. And, the IRS adds, “Preliminary results from the ROBS Project indicate that, although there were a few success stories, most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy (business and personal), liens (business and personal), and corporate dissolutions by individual Secretaries of State.

Some people the IRS tracked who started ROBS plans lost not only the retirement assets they accumulated, but their dream of owning a business, too.

Before moving forward with any kind of funding for your new business, it’s wise to consult with a financial adviser.

Also see: Are women taking over small businesses?

Otherwise, says David Deeds, Schulze professor of entrepreneurship at the University of St. Thomas and executive editor of the EIX (Entrepreneurship and Innovation Exchange) Board (a funder of Next Avenue), it’s easy to get in an “escalating commitment” situation.

That means you start with a specific budget, but when it doesn’t go well — or the money doesn’t come rolling in —you go over budget and keep pushing your limits.

Says Deeds: “You need strong-willed advisers who can help you avoid this error. A startup business is a high-risk undertaking, and you do not want to threaten your financial future in retirement when there is no time to recover.”

Jessica Thiefels is founder and CEO of Jessica Thiefels Consulting. She’s been writing for more than 10 years and has been featured in top publications like Forbes and Fast Company. She also regularly contributes to Virgin, Business Insider, Glassdoor, Score.org and more. Follow her on Twitter @JThiefels and connect on LinkedIn.

This article is reprinted by permission from NextAvenue.org, © 2019 Twin Cities Public Television, Inc. All rights reserved.