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. Thankfully, there are “untraditional” forms of financing that entrepreneurs might not know about that can help solve their money woes.
Rollovers for Business Start-ups: Start Your Business Cash-Rich and Debt-Free
Rollovers for Business Start-ups (ROBS), also known as 401(k) business financing, lets new and existing business owners use their retirement funds to start, buy, or inject funds into a business without incurring tax penalties. Thanks to 1974’s Employee Retirement Income Security Act, you’re able to invest your retirement funds where you see fit – including into your own businesses. 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. The biggest 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.
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. It’s best to work with a qualified and experienced ROBS provider 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. Step 2. The new corporation sponsors the creation of a new 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, making the new business cash-rich with no 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.
The Benefits of ROBS
While starting your business cash-rich and debt-free is one of the biggest benefits of ROBS, the ROBS structure itself provides additional benefits.
- Control Your Money. The stock market is unpredictable, which leads to your money being out of your control. With ROBS, you’re investing in yourself and your business, giving you direct control over what your money does for you.
- Fast Funding. Since there’s no down payment, personal collateral, or credit requirements, the entire ROBS process, from start to funded, can be completed in as little as three weeks. Funding this fast can be the difference between closing a deal or losing out on a great opportunity when purchasing an existing business or franchise.
- Combined Financing. Even if the funds you have in your retirement accounts aren’t enough to finance all your business needs, ROBS can still be a useful tool. After the ROBS process is finished, you can immediately use those funds as a down payment for on a business loan including SBA loans.
- Get Profitable Faster. With ROBS you aren’t paying interest or monthly payments to a lender. Without these costly expenses, your overhead is lower, and you have more cash to use on other business expenses. Both lead to a quicker path of profitability and business success.
- Established 401(k) Plan. The ROBS structure requires that your business establish a 401(k) plan, which is then offered to employees. A retirement plan can be a helpful recruitment tool – especially helpful when small business owners report a 15 percent increase in challenges with recruiting and retention of good talent. The 401(k) plan also gives you the ability to keep growing your own retirement funds.
Choosing the Right ROBS Provider
If ROBS is right for you, the first step is to choose a ROBS provider to make sure your business is set up and maintained according to all the laws that govern it. ROBS can be tricky, and the last thing you want is to trigger a taxable distribution. A good ROBS firm will ensure everything goes according to plan in a swift timeline to get your business started flush with cash and without debt. Here’s what you should consider when you’re looking for the right ROBS provider.
- How much experience does the firm have? Experience means knowledge, networking connections, and expertise in a wide variety of industries. Look into the number of clients the ROBS provider has worked with, the number of years they’ve been in business, and the number of businesses they’ve helped open. It can also be very helpful if your ROBS provider has experience with the type of business you want to open.
- What is the outcome of client audits? A ROBS provider can’t control the number of IRS audits their clients experience, but they should have a stellar track record when it comes to audit outcomes. Learn if any clients have ever failed an audit because of how the firm set up their ROBS structure.
- Does the firm offer legal support for clients? Since ROBS structures can be complex, it’s extremely helpful to make sure legal support is in place for clients who have questions or run into problems. While an internal legal team is nice, access to an external attorney who has your best interests in mind is preferable.
ROBS – Control Your Money, Chart Your Future
It might seem scary to pull funds out of your nest-egg, but ROBS allows for a big opportunity to grow your retirement funds as you drive your business to success. ROBS lets you invest in yourself and your business, putting you in the driver’s seat to control your money and pursue your entrepreneurial dreams.
Guidant Financial helps business owners secure financing to start, buy, or grow a business. An industry leader in business and franchise financing, Guidant works with new and existing entrepreneurs to identify, evaluate, and deploy customized financing solutions. Check out the Guidant Blog for more small business ownership resources. Follow Guidant on Facebook, LinkedIn, and Twitter.