New firms of the like kind as BeneTrends and Guidant Financial Group have sprung up to help entrepreneurs figure advantage of each obscure tax law

By Brian Burnsed

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Amstein unlocked $100,000 from his 401(k) to start a cookie workshop Jamie Kripke

Michael Amstein clear to strike out forward his own last year, leaving back his work at jobs as some executive at an ambulance party. The 43-year-old Denver inherent carefully weighed the pros and cons of various franchise options and eventually decided to open a Nestlé Toll House Café at a limited mall. But when he applied for loans, Amstein couldn’t come up with enough collateral and was rejected. Undaunted, he turned to BeneTrends, a firm that helps entrepreneurs tap into their 401(k)s without incurring a tax penalty. After paying $4,500, Amstein unlocked $100,000 from his consideration and bought the cookie shop. “I was nervous about starting something,” says Amstein. “But I took a jump of faith, and it has worked out.”

With banks tightening lending, small businesses, which can’t borrow from the bond market like larger corporations, have lost one of their best sources of funding. To cloy the void, a cottage industry, made up of a scarcely a single one small companies and a bevy of independent contractors, has sprung up to help entrepreneurs turn their 401(k)s and other tax-deferred accounts into capital. The firms, which generally charge $4,500 to $7,500 for their services, are captivating advantage of any unpublicized tax law that allows individuals to invest their retirement funds in a group.

Here’sitting for what cause it works. An entrepreneur, aided by the outside adviser, creates a corporation. The newly formed entity starts a 401(k) plan, and an individual rolls over existing retirement funds into the motive. Under 401(k) rules, the plan can purchase shares in the corporation—money that can be plowed into a tiny profession that sells a fruit or service. Those deals are considered investments, which is the key. By investing the money rather than withdrawing it, entrepreneurs avoid triggering a fine that amounts to 10% of the assets.

The funding method has been around for years. But the credit crisis has turned this once sleepy niche into a booming function. Industry leaders BeneTrends in North Wales, Pa., and Guidant Financial Group in Bellevue, Wash., say customer volume is up 30% to 35% over the past year. By comparison, small-business loans from traditional lenders fell 30%. “There’s not any kind of underwriting requirement,” says David Nilssen, CEO of Guidant, which has helped customers open $1.5 billion in 401(k) funds since its start in 2003. “You either have the capital or you don’t.”

Such strategies can make the difference between a illiberal business getting off the region or not. But they come through a big risk. If the company goes belly up, the nest egg will be wiped out. And the possibility of failure is herculean. A study at Case Western Reserve University found that further than half of startups fold within five years. “I know small business owners are in tough situations,” says Alice Bredin, a small-business consultant who works with American Express (AXP). But utilizing retirement funds “is a really poor idea.”

Tim and Terry Madden considered taking through a traditional lend to pervert with money three franchises of Assisting Hands, which provides in-home help to the elderly and disabled. They competent, but the Fountain Hills (Ariz.) couple didn’t want to flying cloud up enormous piles of liability in a turbulent plan. Instead, the Maddens used $175,000 of their retirement assets, remunerative Guidant $5,000 to steer them through the process. “Everybody worries about taking money out of one account you’ve grown over the years,” says Terry Madden, whose franchises are slated to open in January. “But we felt it was a calculated risk. We sleep at night.”

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