Small Business Financing FAQ

When you’re trying to learn how to finance your small business or franchise, it can be hard to find information that’s accurate and easy-to-understand. But it shouldn’t be so hard to get the info and education you need. We’ve answered some of the small business financing questions we often hear to get you started. If you want to learn more, you can talk to one of our financing experts for free by contacting us.

Small Business Financing FAQ

What is a ROBS plan?

Rollovers for Business Start-ups (ROBS) is a small business funding method that allows you to utilize your retirement funds for business capital. ROBS isn’t a loan and there aren’t any credit or collateral requirements. ROBS funding can be used to finance a new business or purchase an existing business or franchise. Because of the funding process, the business becomes the sponsor of a new 401(k) plan, which the owner and other eligible employees can participate in.

graphic visualizing the rollover for business start-ups process

Can I use my 401(k) to buy a business without penalty?

Yes. Rollovers for Business Start-ups (ROBS), also known as 401(k) business financing, lets business or franchise owners to access their retirement funds for small business capital without incuring any taxes or early withdrawal pentalties. ROBS is legal and isn’t a tax loophole. Once the ROBS process is complete, you can use the funds as start-up capital to purchase an existing business or franchise or as the down payment on a small business loan.

Can I withdraw money from my 401(k) to start a business?

Yes, you can withdraw money from a retirement account, including a 401(k) account. But if you are under the age of 59 and 1/2, withdrawing money from your 401(k) plan will likely result in paying an early withdrawal penalty. And, of course, no matter what age you are you’ll need to pay taxes. However, if you use ROBS to access your 401(k) funds to start a business, you’ll avoid taxes or early withdraw penalties. ROBS facilitates a legal rollover of your funds into a new retirement account, which then purchases stock in your business. You can use your 401(k) money to start a business, but it needs to be in the form of a ROBS rollover, not a withdrawal, if you want to avoid paying unnecessary costs.

Can you borrow against your 401(k) to start a business?

The best way to access the funds in your 401(k) plan to start a business is via ROBS funding, which is not a loan. Some employer 401(k) plans do allow for loans, but they’re not an ideal vehicle for funding a business because of the restrictions. For example, the most you can borrow from your 401(k) plan is $50,000 or 50% of your vested account balance. Also, you must stay with your employer while you’re repaying the loan otherwise the full amount becomes due, which usually isn’t an ideal scenario for new business owners.

Tailored Funding Options for You

Can I use my 401(k) as collateral for a business loan?

No. But you can utilize the funds in your 401(k) account for small business funding via ROBS. Once you’ve completed the ROBS funding process, you can use that money for any business purpose including as a down payment on a small business loan. Keep in mind; if you have a brokerage investment account, you can use those funds as collateral to access a portfolio loan. To learn more about portfolio loans, visit our Guide to Small Business Funding here.

How do I start a business with an IRA?

Yes. Almost every type of retirement account is eligible for ROBS funding including these types of retirement plans: IRA, 401(k), TSP, SEP, 403(b), SEP, and Keogh. For any of these accounts, the process is exactly the same, and involves rolling funds from your existing retirement account into a new 401(k) account created as a part of the ROBS process. For an in-depth look at the ROBS small business funding process, check out our full guide here.

Can I use my Roth IRA to start a business?

No. Roth IRAs are one of the few types of retirement accounts that aren’t eligible for ROBS funding. One of the benefits of ROBS is the ability to access retirement funds without paying taxes and penalties. However, Roth funds have already had taxes taken out, so the advantage of the ROBS arrangement doesn’t apply. If someone wants to access their Roth IRA to start a business or for any other reason, they won’t need to pay taxes, but an early withdrawal fee may apply depending on their age.

Can I use a self-directed IRA to invest in my company?

Yes, but anyone interested in self-directed IRAs should understand that this is not a business funding method, but a passive investment vehicle. Where ROBS funding allows you to fund your own active business, self-directed IRAs don’t allow you to interact with assets of the plan. For example, if you invest in a business with a self-directed IRA, you may not work for the business and you can’t take a salary. Read more about the differences between ROBS and self-directed IRAs here.

Who qualifies for an SBA loan?

Business owners of all backgrounds who work in most industries can apply for Small Business Association (SBA) loan. These loans are generally funded by individual financial institutions, but the SBA guarantees a portion of the loan. Along with their business plan, lenders typically look at 5 characteristics of borrowers to determine eligibility, which we refer to as the 5 C’s: Capital (down payment), Credit, Capacity, Character, and Collateral. To learn more about qualifying for an SBA loan, see our SBA Loan Guide here.

Where can I learn more about small business financing?

If you have more questions about using your retirement funds to finance a small business or how to obtain a small business loan, check out the further resources on the Guidant Blog and Learning Center. You can also reach out to one of our financing experts for a free consultation by calling 888-472-4455 or contacting us online.

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