Starting your own business can be a dream come true — provided you have the financing to make it happen. While traditional business loan options work for some, they don’t for others. Many opt to fund their businesses cash-rich and debt-free using 401(k) business financing, also known as Rollovers for Business Startups (ROBS).

With ROBS, individuals can seamlessly transfer funds from their retirement accounts into their businesses without incurring early withdrawal penalties or taxes. This increasingly popular method allows entrepreneurs to access capital to start or grow their businesses without taking on debt or seeking external investors. By leveraging your retirement savings, you can maintain full control over your business from the outset with ROBS. But how do you know if you qualify for ROBS? If you’re considering utilizing ROBS to fund your business, you’ll want to answer these five questions first.

Uncover everything you need to know about ROBS in What is ROBS? How 401(k) Business Financing Works.

ROBS Eligibility Checklist: 5 Crucial Questions Every Entrepreneur Should Ask

Small business owners and entrepreneurs are using the Rollovers for Business Startups (ROBS) more and more; however, many financial advisors don’t always understand all the Employee Retirement Income Security Act (ERISA) and Internal Revenue Service (IRS) code guidelines as there are complex processes and strict legal requirements.

Here’s a rundown of the history: In 1974, Congress enacted the ERISA. ERISA shifted the burden of building retirement assets from the employer to the employee. This act, along with sections of the Internal Revenue Code (IRC), provided another method for workers to grow their retirement assets. And that’s exactly what ROBS allows you to do.

As the largest provider of ROBS in the country — having helped more than 30,000 entrepreneurs and small business owners invest over $6 billion dollars — we’ve listed the top five questions to ask yourself to see if you qualify for ROBS, a smart way to use your qualified retirement plan savings to invest in yourself and your small business dream debt-free. Whether you’re an aspiring or current small business owner, you’ll get a better understanding of how to use ROBS to your advantage and avoid common missteps along the way.

Let’s get started.

1. What kind of retirement funds do you have?

First things first: What kind of retirement funds do you have — and are they eligible retirement accounts for ROBS? While 401(k) is the plan most commonly used (hence the name “401(k) business financing”), most retirement plans are actually eligible. Qualified plans include 401(k)s, traditional IRAs, Keogh plans, Thrift Saving Plans (TSPs), and more. See the full breakdown of eligible retirement plans here.

2. How much retirement funds do you plan to roll over with ROBS?

In a ROBS transaction, you don’t have to roll over all the funds from a retirement account. Many choose to utilize only a portion of their retirement savings, opting to leave the rest in their existing account. However, it’s worth noting that the effectiveness of a ROBS arrangement is optimized when a minimum of $50,000 is rolled over. This threshold helps guarantee a solid financial foundation for your business’s growth and development. While there’s flexibility in the amount of retirement funds you can roll over, meeting or exceeding the $50,000 benchmark is heavily advised.

You can also roll over multiple retirement savings with ROBS, whether that be your own or with a co-investor. In fact, a unique feature of ROBS is that it enables various people — be it your spouse, business partners, or a group of investors — to combine their retirement funds to start or buy a business together.

Discover the power of using Rollovers for Business Startups (ROBS) in Maximizing Your Retirement: ROBS as an Investment.

3. Are you currently employed?

In order for ROBS to work, your retirement funds must be rollable. In most cases, this means you must no longer be employed by the company that sponsors your existing retirement account. However, it’s wise to begin gathering information about ROBS even while you’re still employed. This proactive approach gives you time to familiarize yourself with the intricacies of the process — and gain a sense of confidence in your decision regarding small business ownership before taking the leap. Starting early affords you the opportunity to explore all facets of ROBS, ensuring that you’re well-informed and prepared for the transition into entrepreneurship when the time is right for you. Remember: To take advantage of ROBS, you must also be a bona fide employee of your new company.

Want to keep your job while using ROBS? Here’s How to Use ROBS to Fund Your Small Business While Keeping Your Job.

4. What kind of business do you wish to purchase or start?

Virtually any legal, U.S.-based business has the potential to qualify for ROBS, whether it’s a franchise, a startup, or an acquisition. However, it’s essential to note that there is one fundamental requirement: the business must be structured as a C Corporation (C Corp). This means that while a wide array of business types can benefit from ROBS — from small startups to established franchises — they must adhere to the C Corp filing status to be eligible for this financing method. As a business entity, C Corps align with the regulations governing ROBS transactions — and offer a host of unique tax benefits for business owners. 

Note: Passive investment ventures, speculative ventures, or businesses engaged in illegal activities are not eligible for ROBS.

Learn more about C Corps — from its pros and cons to how to set up one in What’s a C Corp?

5. Do you need additional funding?

ROBS offers the flexibility to be combined with other types of financing, boosting the purchasing power for aspiring business owners. By leveraging ROBS alongside alternative funding methods, you can access a broader spectrum of financial resources to support your entrepreneurial endeavors. For example, your rollover funds through ROBS can serve as a down payment on a business loan — allowing you to conserve more of your savings for future needs or unforeseen expenses. This strategy can empower you to strategically allocate your resources and help optimize your financial position while embarking on the journey of business ownership.

Looking for ways to fund a small business loan? See Using Your 401(k) as an SBA Loan Down Payment — Penalty-Free.

Moving Forward with ROBS

Now that you’ve answered the above questions, you’re closer to understanding how to use ROBS to your advantage. ROBS might be your solution to finance your business dream if you…

• Have 50K in eligible retirement savings
• Want a debt-free and cash-rich business financing strategy
• Wish to leverage your retirement funds early without incurring withdrawal or tax penalty fees

Remember: ROBS is a business financing strategy that is especially advantageous for first-time business owners who may not have the highest credit score and aren’t comfortable putting up property as collateral for a more traditional loan. The benefits for prospective business owners are numerous, from allowing you to fund or buy a new or existing independent business or franchise completely debt-free to giving you control of your future. Instead of investing in the market, you’re investing in yourself — a smart choice for a smart small business owner who wants a quick path to profitability.

As America’s No. 1 ROBS Provider in the U.S., Guidant Financial can help. Our team of experts can help determine if ROBS is the right fit for you and tailor a financing strategy best suited for your business goals. With over 30,000 American small businesses funded, you can trust Guidant to take the stress out of business financing and help you bring your business dream to life.  

Are you ready for ROBS? Pre-qualify with Guidant Financial today. You can even use ROBS in combination with traditional business loans for your business venture.

“When Falling Sky Brewing presented itself as a great opportunity for me, I needed the capital. Traditional lenders weren’t going to do it. I took a chance on myself that I could grow my business and my 401(k)… And I thought, ‘You know what? I could do this without overhanging debt.‘”

— Stephen Such, Falling Sky Brewing

Read the stories of REAL small business owners who work with Guidant.