ROBS vs. SBA Loans: Pros and Cons

The biggest challenge prospective entrepreneurs have is how they’re going to finance their new business. It takes money to make money, so business owners often turn to help from a lender to kickstart their company. However, loans aren’t the only funding option available. Rollovers as Business Startups (ROBS) are another way for business owners to capitalize their startups using existing retirement funds.

When considering SBA Loans vs. ROBS financing, you should weigh the benefits and drawbacks of each so that you make an informed decision.

Benefits of ROBS

The ROBS funding program lets you access personal retirement funds from a previous employer’s 401(k) plan. Rolling those funds over through ROBS is not a taxable distribution and there is no penalty. ROBS isn’t a loan, either, which means it comes with zero interest and is a great debt-free way to fund your small business.

Unlike some loans, ROBS doesn’t limit how you can spend the money. Business owners can allocate funds toward equipment, real estate, operational overhead and paying employees—including yourself.

ROBS also has the benefit of being fast funding. Loans can take months to process and be approved, while ROBS can be set up in a matter of weeks. This allows entrepreneurs to move quickly on business opportunities.

ROBS considerations

If your business closes (and you don’t sell it, your assets, etc.), the retirement funds you invested will not be recouped. However, the remainder of your retirement assets cannot be seized to satisfy and remaining debt (which is definitely a pro!).

Additionally, because of initial fees and set-up for a ROBS, you’re going to need to invest at least $50,00 upfront. Generally people who need less than $50,000 decide not to use a ROBS once reviewing the initial costs as opposed to taking a distribution or other method of funding.

Benefits of SBA loans

SBA loans are guaranteed through the federal Small Business Administration. This funding option offers some of the lowest interest rates available to prospective entrepreneurs. Traditional bank loans can be difficult to qualify for and often have less-appealing terms. This makes SBA loans a friendlier option for business owners with limited startup funds.

Business owners have numerous options for SBA loan amounts and repayment durations depending on their unique financial situation. The SBA has partnered with banks to support everyone from brand-new small businesses to more established corporations. No matter how much or how little money you’re starting off with, there’s likely an SBA loan that works for you.

Drawbacks of SBA loans

Even though SBA loan terms are hard to beat, using this funding option means interest and loan payments will become part of your company’s monthly costs.

Additionally, SBA loans usually require collateral. For this reason, business owners shouldn’t commit to an SBA loan unless they’re confident they can pay it off within the agreed-upon repayment terms. If the loan defaults, the resulting fees come straight out of your wallet or assets.

Collateral is not the only requirement, and your lender will discuss these with you. Paperwork–lots of it–is an inherent part of any SBA Loan process. Additionally, patience is key. SBA Loans don’t get approved or happen overnight. In fact, it’s not unusual for the SBA Loan process to take five to six months, or longer depending on real estate. If you need money fast, or don’t have the patience to work the process as set forth by the lender, an SBA Loan is likely not going to work for you.

Customize your small business financing

Contrary to popular belief, you don’t have to choose between ROBS or an SBA loan. Many entrepreneurs utilize both financing options simultaneously to launch their small business.

Tenet Financial Group can help create a financing plan that allows your small business to reap the benefits of both funding options while avoiding potential pitfalls. Contact us to learn more!