Many entrepreneurs have heard about Rollovers as Business Startups (ROBS), but few fully understand it. There are plenty of misconceptions about ROBS that deter small business owners.
In reality, ROBS is an attractive funding model that can help a range of business owners find success. Don’t let these four common myths and misconceptions about ROBS stop you from exploring whether it’s right for you.
ROBS is a loan from your retirement account: False
Many people think that ROBS is just another way to take a loan out against your 401(k). This isn’t true! ROBS is not a loan at all. It’s a way to use your retirement funds to invest in your business, just like you’d invest in other businesses through an investment portfolio.
Rollover funding is completely debt-free. The money you use as startup funding does not need to be paid back. This makes ROBS an attractive financing option, since you can launch your business with less overhead from loan payments.
Getting ROBS funding is a long and complicated process: False
ROBS is actually one of the fastest funding models available to aspiring business owners! Within around four weeks, you can have a new 401(k) established for your business and access funding from your former retirement account.
As for the complicated process, funding with ROBS is not entirely straightforward. There are intricate rules and restrictions from the IRS to be followed. However, working with a third-party administrator (TPA) alleviates the burden of navigating these challenges. An experienced TPA will help you navigate ROBS guidelines and set up your account with ease.
ROBS has to be a stand-alone funding method: False
ROBS is actually a very flexible method of obtaining business funding. If you are also getting a loan, for example an SBA 7(a) loan, funds from a ROBS can be used to satisfy the non-borrowed equity injection and the post-close liquidity needed to satisfy lender requirements.
If you want to use funds from your pre-tax retirement account to fund a business and also want to get an Unsecured Line of Credit, a Loan, or even if you have investors, you can absolutely do that. There are no stipulations about combining Rollover dollars with other funding, making ROBS a funding type that plays well with others.
ROBS restricts what you use the money for: Mostly False
The primary stipulation for business type when using a ROBS is the business must be a for-profit business. Then, the money you invest can be used for almost any business-related expense. ROBS funding can be used to purchase land, buy or lease a building, purchase equipment, stock up on inventory, pay debts and many other startup costs. You can even use ROBS to pay employees’ and your own salary.
Don’t fall for ROBS myths and misconceptions
If you’ve considered using ROBS to fund your small business but have heard some of these myths, take time to dig a little deeper. In time, you may find that ROBS is the debt- and penalty-free financing method you’ve been looking for!
Do you have questions about ROBS? Tenet Financial Group can provide answers and separate fact from fiction. Contact us today to learn more and explore financing options for your small business.