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Rollovers for Business Start-ups (ROBS) - Step by Step Guide

One of the greatest hurdles aspiring business owners face is securing adequate financing. The cash and eligibility requirements for obtaining a traditional small business loan can be a challenge for many borrowers to meet. That’s why many prospective business owners are turning to alternative financing methods to make their dreams come true — and they’re succeeding! One of the alternative funding avenues that is growing in popularity is Rollovers for Business Start-ups (ROBS), also known as 401(k) business financing. 

ROBS funding allows entrepreneurs to use their retirement money for start-up funding, to acquire an existing business or to finance the purchase of a franchise — all in a fast, tax penalty-free transaction. 

Let’s take a closer look at the history and process that make ROBS funding possible.

The History and Legality of ROBS

Many entrepreneurs who aren’t too familiar with ROBS (and even those who are) have a lot of questions about the process — mainly regarding the legality of its structure. ROBS, or 401(k) business financing, has actually been an option since 1974 when Congress passed the Employee Retirement Income Security Act (ERISA), which shifted the responsibility of retirement savings from the employer to the employee. Critics of ROBS sometimes argue that retirement funds should be left in a retirement account. However, traditional brokerage accounts invest in public businesses, and, as you’ll see below, this structure is very similar. Instead of being placed in a volatile market, your retirement funds go to financing your own private business. Who better to bet your money on than yourself?

Qualifying for ROBS is Simple

Unlike traditional business loans, there are very few eligibility requirements for ROBS. Without credit, collateral, or down payment requirements, the funding process can move quickly, sometimes in as little as three weeks. The one essential requirement for ROBS funding is that you have at least $50,000 in an eligible retirement account, to ensure the tax benefits you receive from ROBS outweigh any associated fees. You technically can complete ROBS with less in your account, but it’s not recommended. It’s also important to note that while most retirement funds are considered “rollable,” Roth IRA funds are not eligible for ROBS funding. 

You can find out if you qualify for ROBS, as well as a number of other funding options, in minutes by completing a short pre-qualification survey online. 

If you want to get started with ROBS, the first step is to find a third party provider who can help you properly complete the process. Because each ROBS step can be complex and must be completed following IRS and DOL guidelines to avoid triggering any tax penalties, a qualified and experienced ROBS provider can make sure you stay in compliance, as well as help you complete the process quickly and easily. Learn about what you should look for in a ROBS provider.

How Does ROBS Work?

Step 1 – C-corporation

A new business is established as a C corporation, a type of business entity that is taxed separately from its owners or shareholders.  It’s also possible to convert an existing business, such as an S corporation (another type of entity where owners or shareholders are subject to tax on their shares), to a C corp. 

Step 2 – 401(k) Plan

The new corporation creates (or opens) a 401(k) plan, which can purchase private stock.

Step 3 – Rollover

Funds from the existing retirement account are rolled into the new 401(k) plan.

Step 4 – Stock Purchase

The 401(k) plan purchases stock in the new C corp, resulting in a cash-rich entity.

Step 5 – Debt-free Business

The funds can now be used to fund the launch of a business, purchase a franchise, or as the down payment on an SBA loan

The Funding Advantages of ROBS

The ROBS arrangement is not a loan. You do have the opportunity to grow your retirement plan as you build up your business, but there are no required monthly payments and no interest charged. Many small business owners choose ROBS funding for this exact reason, but there are also a number of other factors to consider:

  • The ability to build up your business. Without monthly payments to make, you can more quickly reinvest your revenue back into building your business. This is essential to surviving the first few years of business when cash is often tight.
  • Fast funding. The entire ROBS process from start to funded can be completed in as little as three weeks. Fast funding can be the difference between closing the deal or not when purchasing a franchise or an existing business.
  • Combining financing. If you don’t have enough money in your retirement account to fund the business of your dreams, you can still utilize ROBS. After the ROBS process is complete, you can immediately use the funds as the down payment on an SBA loan or another business loan — drastically increasing your overall buying power.
  • Established 401(k) plan. The ROBS funding structure requires the establishment of a 401(k) plan, which then must be offered to employees. As a business owner this is a great recruiting tool, and as an employee yourself, it gives you the opportunity to continue to build your nest egg.

Want to learn even more about ROBS? Check out Guidant Financial’s Complete Guide to ROBS.

No matter where you’re at in your search for business funding, know that you have options. If you’re interested in starting your business debt-free, ROBS funding may be the right choice for you. Start your journey to business ownership by learning how much funding you can pre-qualify for today.

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. 





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