This tax-deferred, penalty-free franchise financing option can help you secure your business dreams without debt or worry.
Starting your own business is an exciting endeavor, but getting the funding you need can be a major challenge. Traditional small business loans often come with strict cash and eligibility requirements that many aspiring entrepreneurs find difficult to meet. That’s why many people are exploring alternative franchise financing options to turn their business dreams into reality. One such avenue is Rollovers for Business Start-ups (ROBS), also known as 401(k) business financing.
ROBS funding offers a way for entrepreneurs to use their retirement savings to kickstart their businesses, acquire an existing business, or invest in a franchise, all without incurring tax penalties—and in a speedy manner. Let’s delve into the history and process behind ROBS funding to better understand how it works and why it’s a viable option for aspiring business owners.
The History and Legality of ROBS Funding
ROBS funding, or 401(k) business financing, has been available since 1974 when Congress passed the Employee Retirement Income Security Act (ERISA). This act shifted the responsibility of retirement savings from employers to employees. While some critics question the legality of using retirement funds for business ventures, it’s important to note that this structure is like traditional brokerage accounts investing in public businesses. Instead of relying on the market’s volatility, your retirement funds are directed toward financing your own business—a bet on yourself!
Qualifying for ROBS Franchise Financing is Simple
Unlike traditional business loans, ROBS has minimal eligibility requirements. You don’t need to worry about your credit score, collateral, or down payment. This franchise funding option can move swiftly, often in as little as three weeks. The main requirement is having at least $50,000 in an eligible retirement account to ensure the tax benefits outweigh any associated fees. While most retirement funds are eligible, Roth IRA funds are not suitable for ROBS funding.
You can quickly determine your eligibility for ROBS and explore other funding options by completing a short pre-qualification survey online.
To get started with ROBS, the first step is to find a qualified third-party provider who can guide you through the process. Each step of ROBS can be intricate and must adhere to IRS and Department of Labor (DOL) guidelines to avoid tax penalties. A knowledgeable provider can ensure compliance and make the process smooth and efficient.
How Does ROBS Work for Franchise Financing?
Step 1 – Establish a C-corporation:
Form a new business entity known as a C-corporation, which is taxed separately from its owners or shareholders. Existing businesses, such as S corporations, can also be converted to C corporations.
Step 2 – Set up a 401(k) Plan:
Create or open a 401(k) plan for the new corporation, allowing it to purchase private stock.
Step 3 – Rollover Funds:
Transfer funds from your existing retirement account into the new 401(k) plan.
Step 4 – Purchase Stock:
Use the 401(k) plan to buy stock in the new C corporation, creating a cash-rich entity.
Step 5 – Debt-free Business:
Utilize the funds to launch your business, acquire a franchise, or secure an SBA loan.
The Advantages of ROBS for Franchise Financing
ROBS isn’t a loan, which means you won’t have monthly payments or interest charges. This allows you to reinvest your revenue back into your business more quickly, which is crucial during the initial years when cash flow can be tight. Other benefits include:
Fast funding: The entire ROBS process can be completed within three weeks, providing a timely boost for purchasing a franchise or an existing business.
Combining financing: If your retirement account doesn’t have enough funds, you can still use ROBS in conjunction with other financing options, such as SBA loans, to increase your buying power.
Established 401(k) plan: The ROBS structure necessitates the establishment of a 401(k) plan, which can be a valuable recruiting tool for your business and allow you to continue building your retirement savings.
Regardless of where you are in your search for business funding, remember that you have options. If you’re interested in starting your business debt-free, ROBS funding could be the solution for you.
Benetrends Financial—a Leader in Franchise Funding Solutions
Franchise Business Review has partnered with Benetrends Financial, a leader in franchise financing, to help inform potential franchise buyers and provide a reputable and reliable resource for franchise funding consultation.
Benetrends Financial is a trusted resource for financing advice, specializing in franchise funding. They don’t just offer the innovative ROBS (Rollovers-as-Business-Startups, Benetrends’ founder, Len Fischer, pioneered its usage with its Rainmaker Plan 40 years ago. They’ve helped countless entrepreneurs secure funding for their dream franchises. Whether it’s ROBS, SBA loans, securities-backed lines of credit, or other solutions, Benetrends guides entrepreneurs to the right funding solution for each investor’s unique needs and goals, ensuring a seamless experience from start to finish.
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