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What The 401(K) Could Mean For SMEs

The concept of alternative lending can mean many different things. It’s a market that encapsulates peer-to-peer financing, crowdsourcing an online loan shopping, and new versions of alternative finance are cropping up often.

The latest could be in a less expected place: the 401(k). New research from R Street Institute found that the retirement investment fund could be a lucrative way to invest in small- and medium-sized enterprises. Researchers are proposing a regulatory change to allow investors to invest 10 percent of their 401(k)s through crowdfunding sites, reports said Wednesday (July 1).

To lessen the risk of such investments, the researchers said, securities purchased through these sites could be resold on secondary markets.

Author Oren Litwin concluded that the retirement fund is a way to promote communal support of small businesses and encourage “vibrant marketplaces where small companies can raise capital from their own communities.”

Other industry experts, however, are doubtful that such a plan would take hold. Ginsberg Jacobs LLC finance attorney Anthony Zeoli told nerdwallet that such a proposal would require significant action from each individual states, including the establishment of crowdfunding markets and secondary markets to resell securities. According to reports, Michigan is currently the only state with a secondary market. What’s more, 401(k) administrators would have to approve of such a venture.

But small business owners would gain access to a pool of $4.4 trillion in 401(k) accounts, where such investments stood as of June 2014, reports said.

Such a venture would also be difficult to implement because demand may not be sufficient, the latest figures suggest. Mainstream banks are actually lending to small businesses at record rates since the recession, while findings from the May 2015 Small Business Lending Index found that SME loan applications were down compared to the rest of the year, suggesting that entrepreneurs are not seeking out financing as much as they once were.

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