Small Business Loans

The 401k loan information on this website only applies to individuals who are self employed and eligible for a Solo 401k. This website explains how a small business owner can get a 401k loan up to a maximum of $50,000 using a Solo 401k loan. This information does not apply to 401k plans sponsored by an employer.

Are you an independent contractor, self employed individual or a small business owner?

If you are then you should consider opening a Solo 401k.

An owner only business, an owner and spouse business and a partnership are eligible for a Solo 401k. Independent contractors, self employed individuals and small business owners frequently setup Solo 401k plans. Sole proprietorships, partnerships, LLCs and corporations (including both subchapter S and C corporations) would qualify. You are eligible to establish a Solo 401k for a side business even if you participate in a 401k, 403b or 457 plan through your primary employer.

One benefit of a Solo 401k is a 401k loan. IRS rules permit 401k loans, however not all Solo 401k providers allow loans.

Provided there is a loan provision, then a 401k loan is permitted using the accumulated balance of the 401k as collateral for the loan. 401k loans are permitted up to 50% of the total balance of the 401k up to a maximum of $50,000. A loan from a Solo 401k is received tax free and penalty free. There are no penalties or taxes due provided loan payments are paid on time.

Solo 401k loans are paid either monthly or quarterly over a 5 year term. A Solo 401k loan used for the purchase of a primary residence may have a 15 year term. 401k loans must be repaid according to the terms of the loan amortization schedule which is provided when a loan is initiated.

Why consider a Solo 401k loan as a small business loan?

Small business loans are often needed by small business owners, entrepreneurs and self employed individuals. Getting a small business loan through banks and lending institutions can be difficult. Potentially there is a simple solution. Many small business owners are getting loans up to $50,000 using a Solo 401k loan as a small business loan because 401k loans are fast, easy to obtain and have favorable interest rates.

What are the advantages of using a Solo 401k loan as a small business loan?

  • The loan can be used for any purpose.
  • Since you are using your Solo 401k’s balance as collateral, you are automatically approved for the loan.
  • There are no income or credit qualifications. As a result, bad credit won’t prevent you from getting a 401k loan.
  • Since you are borrowing your own money, principal and interest payments are paid back into your own 401k.
  • 401k loan interest rate is low – Prime Rate (3.50%) +1% or 2%.

What are the disadvantages of a Solo 401k loan?

401k loans must be repaid according to the terms of the loan amortization schedule which is provided when a loan is initiated. Failure to repay the 401k loan according to these terms will result in a loan default. Income taxes would be due on the remaining unpaid balance of the loan and there is a 10% IRS penalty.

Also, by taking a 401k loan you are removing assets from your 401k. If your investments grow in value the outstanding loan balance will not experience that growth. As a result, you may not experience the same level of growth in your portfolio as compared to if you not taken a 401k loan and left all the money to grow in your 401k.

What retirement accounts can be transferred into a Solo 401k?

You can rollover your 401k, 403b, 457 retirement plan from a previous employer. You can transfer a Rollover IRA, Traditional IRA, SEP IRA, Simple IRA and Keogh plan.

You can’t rollover a Roth IRA into a Solo Roth 401k. You can rollover a Roth 401k into a Solo Roth 401k.

How does this small business loan work?

There are 2 main factors that will determine if this is going to be a viable small business loan option.

1) Are you eligible for a Solo 401k?

An owner only business, an owner and spouse business and a partnership are eligible for a Solo 401k. Independent contractors, self employed individuals and small business owners frequently setup Solo 401k plans. Sole proprietorships, partnerships, LLCs and corporations (including both subchapter S and C corporations) would qualify. You are eligible to establish a Solo 401k for a side business even if you participate in a 401k, 403b or 457 plan through your primary employer.

In order to qualify for a Solo 401k a business owner can not employ salaried, W-2 employees who work more than 1,000 hours in a calendar year. Business owners and their spouse do not apply to this 1,000 hour threshold.

A business owner who employs part-time W-2 employees may be able to exclude them from plan participation. Generally, under federal law you are permitted to exclude the following types of employees:

  • Employees under age 21.
  • Employees with less than one year of service.
  • W-2 employees who work less than 1000 hours per year.
  • Certain union employees.
  • Certain nonresident alien employees.

Learn more about the Solo 401k.

2) Do you have assets in a 401k, 403b, 457 or Thrift Savings Plan with an ex-employer, or do you have a Rollover IRA, Traditional IRA, SEP IRA, Simple IRA or Keogh Plan?

If you are eligible for a Solo 401k and you have existing retirement accounts, then there is a simple solution to getting a new small business loan. You can setup your own Solo 401k, can transfer your retirement accounts into the Solo 401k and then you use your 401k money as collateral to get a loan. You can get a loan up to 50% of the value of the Solo 401k up to a maximum of $50,000.

Example: Bill is a 45 year old sole proprietor with no employees. Bill decides to open a Solo 401k to save for his retirement. After opening the Solo 401k he transfers $25,000 from his Rollover IRA, $25,000 from his SEP IRA, $25,000 from his Traditional IRA and does a 401k rollover of $25,000 from a previous employer’s 401k.

After the four retirement accounts have been transferred into Bill’s Solo 401k he would have a $100,000 balance. He would qualify for a maximum 401k loan of $50,000. If Bill submitted a 401k loan request for $50,000 then he would receive a check for $50,000 for the loan and he would have a $50,000 balance remaining in his Solo 401k. The remaining $50,000 would continue to be invested and monthly loan payments would also be invested.

Note: A Solo 401k loan is not a debt instrument. The loan is not made by a bank or lending institution. With a 401k loan you are simply borrowing your own money from your 401k

What is the process to secure a small business loan using the Solo 401k?

  1. Open a Solo 401k.

  2. Rollover/Transfer your retirement accounts – You can rollover your 401k, 403b, 457 retirement plan from a previous employer. You can transfer a Rollover IRA, Traditional IRA, SEP IRA, Simple IRA and Keogh plan.

  3. Submit Loan Request Form – Once the retirement assets have been transferred into your Solo 401k for 5 business days, you are immediately eligible for a loan. You are permitted to receive a loan up to 50% of the total 401k value up to a maximum of $50,000.