401(k) business funding as growth capital for an existing business

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401(k) business financing (formally called Rollovers for Business Start-ups or ROBS) is not just for start-ups or first time business owners, despite what the name implies. Between 30 – 40 percent of Guidant Financial’s clients who use their retirements funds to buy a business own or have owned a business.  Here are some common reasons as to why ROBS is beneficial for an existing business owner:

401(k) Business Financing Offers Fast Access to Growth Capital

It is not uncommon that many business owners start out as their business’ sole employee.  But when their business starts to grow, so does the need to continue to invest in the business by hiring more staff, onboarding more suppliers to provide larger volume, etc.  401(k) business financing offers a way for this business owner to get the infusion of capital quickly to cover additional salaries, pay for more product and keep up with the demand to continue to grow their business. Similarly, when a franchise owner is ready to expand beyond their first location, ROBS can provide the capital they need to finance a new territory without having to take on additional debt. Since ROBS isn’t a loan, it doesn’t put any additional strain on the business with monthly payments.

Most ROBS deals close within three weeks, and there are very few qualification requirements aside from having at least $50,000 in an eligible retirement account. This makes it an attractive alternative to getting a business loan.

It Provides an Alternative Method of Recapitalizing an Existing Business

ROBS also works to recapitalize a business. There are two ways this can work: A reduction of debt or using ROBS in combination with a business loan to expand financial qualification.

First, the funds from 401(k) business financing can be used to pay back an existing business loan. This frees up cash flow for the business to reinvest in itself and increases a business’s credit score by showing they paid their loan in full.

Secondly, if a business needs additional capital to keep operations running, they can choose to use their retirement funds as a down payment on a business loan.  Doing so allows an owner to preserve their personal savings by using this alternative source of capital. About 45 percent of Guidant’s SBA clients use their retirement funds as the down payment on their loan.

It Holds You to a Higher Standard of Business Operations

One of the requirements of the ROBS arrangement is that you must create a C corporation and run it according to IRS and DOL guidelines. This means quarterly financial reviews with an accountant, business valuations, annual reports and filing IRS Form 5500, etc. In a nutshell, you’ll be required to know more about your business and how it runs than your typical entrepreneur, which is in the best interest of both your business and your investment. By being well educated, you’ll be able to make the best decisions for your company to keep in on track and improve performance.

It Offers a Competitive Edge for Employees

The ROBS arrangement can put a business ahead of its competition because they have significantly less debt to pay back. What’s more, under the ROBS arrangement, the business’s C corporation must sponsor a retirement plan and offer it to all eligible employees. This allows the business to recruit and retain higher caliber employees with the potential for contribution matching and profit sharing.

ROBS is an often overlooked yet beneficial financing option for existing businesses looking to grow or maintain their current operations. Want to see if ROBS could be right for your business? Click here to pre-qualify now.

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