Financing the Small Business in Today’s Environment

Guest post from Mr. Tim Stamps DRDA, PC

Most of us have encountered a budding entrepreneur who has spent the majority of his/her career in the corporate world and then finally musters the courage to step out on a limb and start their own small business. They face a few problems, though: despite his long-standing corporate career and a nice 401(k) for retirement, they have very few liquid assets and are in need of some capital for their business start-up.

For many small business owners the prime source of funding comes from personal savings, or by refinancing their personal residence with a home equity line of credit. Even so, entrepreneurs still often use outside sources such as friends and family, capital markets, or private equity groups. Funding from third parties can prove undesirable, though, because outside sources usually expect a lion’s share in the business in return for equity financing.

BORSA: A compelling, yet widely unheard of source of equity is the Business Owners Retirement Savings Account. BORSA, for short, is a tool which allows entrepreneurs to fund the purchase or recapitalization of a franchise, business start-up, or business property using their holdings in a 401(a) pension profit sharing 401(k), 403(b), 457, or IRA rollover. By utilizing the BORSA these purchases can be accomplished without distributions, taxes, penalties, or the use of retirement plan loans.

DRDA, P.C., a CPA firm, designed the BORSA (c) in 2005 as a result of extensive research for a tax and penalty-free solution for clients with the need to access their retirement accounts to start a business. They analyzed the provisions of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA), as well as professional publications and court cases that they felt were pertinent. Additionally, DRDA sought the expertise of a nationally recognized ERISA attorney to solidify the legality of such a solution. Today, the BORSA is recognized and is available in all 50 states.

There are three basic requirements for setting up a BORSA for a business venture. First, the business owner must have an existing retirement account such as an IRA or one of the other aforementioned accounts and have the ability to transfer or rollover the funds in the BORSA. Second, the business must be an eligible “active trade or business” that will have at least one employee. Third, the individuals need to work with professionals familiar with BORSA rules and governing laws.

To clarify, a BORSA is not a loan, nor a self-directed IRA. A direct investment into an “active trade or business” by a self-directed IRA is prohibited. The federal government does recognize the use of money from a 401(k) plan as an equity investment. In fact, the Small Business Administration SOP 50-10(5) that was released August 1, 2008 stipulates the SBA will not require a 401(k) plan owning more than 20% or more of a company to guarantee the loan. What’s more, unlike other sources of funding such as credit cards, SBA or asset-backed loans the BORSA plan does not generate additional debt for the business owner.

For additional information on the BORSA plan visit or contact Tim Stamps at DRDA, P.C: 1521 Green Oak Place, Ste 198, Kingwood, TX 77339; telephone: 281-852-3131; email