401(k) business financing, Rollovers for Business Start-ups and ROBS. For entrepreneurs who are considering the idea of using their retirement funds as small business financing, they’ve probably heard these phrases many times. But what’s the difference between these terms? Fortunately, distinguishing between them is easy. Simply put, the difference is: nothing.
401(k) business financing and Rollovers for Business Start-ups (ROBS) all refer to the practice of using eligible retirement funds to start or buy a business without incurring tax penalties or getting a loan. The IRS deemed this structure a Rollover for Business Start-ups or ROBS arrangement, but many refer to it more simply as 401(k) business financing or 401(k) business funding. No matter what you call it, it’s a fast, easy and affordable way for small businesses to obtain capital, and it’s gaining popularity.
Let’s take a closer look at a few of the other common questions about this financing structure:
Is 401(k) business financing legal?
Though the acronym ‘ROBS’ can sound a little concerning, using your retirement funds as capital for a small business is not a tax loophole. The Employee Retirement Income Security Act of 1974 passed the responsibility of retirement savings from the employer to the employee, meaning you have the right to direct your retirement funds as you see fit, including to start a new business.
The ROBS process works as follows:
- A new business is established as a C corporation.
- The C corporation creates a new 401(k) plan that can purchase private stock.
- Funds from an existing retirement account are rolled into the new 401(k) plan without triggering a taxable distribution.
- The 401(k) plan purchases stock in the C corporation.
- The C corporation uses funds from the stock purchase to start or acquire a business.
- The new business is now cash-rick and debt-free.
Is 401(k) business financing a good fit for you?
Using Rollovers for Business Start-ups to fund your new business has a multitude of benefits. First, using the ROBS arrangement allows you to start your business debt-free. Because you’re not borrowing from your retirement account but rolling funds into a new 401(k), there’s no interest charged and no monthly payments to make. Starting your business without debt allows you to invest your earnings back into your business, putting you in a better position financially. In fact, 81 percent of Guidant clients are still in business after four years, which is about 40 percent higher than the national average for small businesses.
401(k) business financing is also very fast and easy to qualify for compared to traditional business financing options like loans. There are no collateral or credit score requirements, which makes the application process simple. Essentially, if you have at least $50,000 in a rollable retirement account, you’re qualified for ROBS financing.
There are very few types of businesses that aren’t a good fit for ROBS. However, some passive business models don’t qualify. To ensure that ROBS is the right fit for you and your business, Guidant Financial pays for time with an Outside Counsel attorney to discuss your business before moving forward with ROBS funding. This attorney represents you, not Guidant, and will help you make the decision that’s in your best interest.
How do you choose a 401(k) business financing provider?
Setting up and maintaining the Rollovers for Business Start-ups structure can be complex, which is why it’s important to work with an experienced ROBS provider that has experience. As with any financial commitment, it makes sense to shop around and learn as much as you can before moving forward with one provider. Here are a few things to consider as you choose your ROBS provider:
- Industry and Product Experience: Be sure to ask not only how long the company has been in business, but how many ROBS transactions they perform each year. Very few transactions could signal a firm that’s not as well-versed in the ROBS process.
- ROBS Expertise: Any provider you work with should have subject matter experts on their team who understand small business and can help educate you on the nuances of this funding structure.
- Third Party Reviews: Check reputable sites for reviews on companies that provide a business service such as the Better Business Bureau and Reseller Ratings.
For an in-depth look at more questions to ask any provider, download our free eBook: 7 Questions to Ask Every ROBS Provider.
Whether you prefer to call it Rollovers for Business Start-ups, ROBS or 401(k) business financing, more and more business owners are using this method to start their businesses debt-free and put them on the path to success.