Even the most motivated entrepreneurs may feel discouraged with the challenges of finding enough funding to get their dreams of small business ownership off the ground. In fact, according to Guidant Financial’s State of Small Business survey, the biggest hurdle to starting or expanding a business is financing. Thirty-one percent of aspiring small business owners cited an inability to find funding as their number one roadblock, and 33 percent of current business owners said a lack of cash or capital was their biggest challenge.
But there are methods to get through the madness, including one financing avenue that lets you start your business cash-rich and debt-free.
Rollovers for Business Start-ups – aka 401(k) Business Financing
Rollovers for Business Start-ups (ROBS), also known as 401(k) business financing, allows business owners to use their retirement funds to start, buy, or inject funds into a business without incurring tax penalties.
The most notable requirement for ROBS is that you have a rollable retirement fund. Most ROBS providers also recommend having at least $50,000 in this fund; otherwise, provider costs and other fees outweigh the benefits.
ROBS is not a loan, so there’s no credit, collateral, or down payment requirements. In fact, ROBS can be a great option for accessing funds for a down payment for other funding methods, such as SBA loans.
How Does ROBS Work?
Correctly setting up a ROBS financing structure can be complicated, since there are specific steps that need to be taken to make sure an early withdrawal tax penalty (also known as a “taxable distribution”) isn’t triggered. While ROBS is 100 percent legal – it’s made possible by the Employee Retirement Income Security Act – not all lawyers or banks have heard of it. It’s best to work with a qualified and experienced ROBS provider to teach you about the ins and outs of ROBS and to make sure the process runs smoothly.
Here’s a simplified look at how a ROBS financing structure works, step by step.
Step 1. A new business is established as a C corporation. It’s also possible to convert an existing business, such as an S corp, to a C corp. ROBS hinges on the C corp’s ability to have purchasable stock, so this is a must.
Step 2. The new corporation sponsors the creation of a 401(k) plan, which can purchase private stock.
Step 3. Funds from the existing retirement account are rolled into the new 401(k) plan.
Step 4. The 401(k) plan purchases stock in the new C corp, starting the new business out cash-rich and without debt.
Step 5. The funds can now be used to fund the launch of a business, purchase a franchise, or even as the down payment for an SBA loan.
It’s also good to note that while most retirement accounts are considered rollable (including 401(k), IRA, or 403(b) accounts), Roth funds are not eligible for ROBS. An experienced ROBS provider can help you determine if your retirement fund qualifies.
While it might seem scary to pull funds out of your nest-egg, ROBS puts you in control of your money, instead of putting your retirement in the hands of a volatile market. With ROBS funding, you’re in the driver’s seat of propelling your business to success. Invest in yourself – and your entrepreneurial dreams.
Interested in learning more about Rollovers for Business Start-ups or other helpful small business information? Check out the Guidant blog.
