Why ROBS is Preferable to Debt for Your Small Business

When looking to start their own businesses open a franchise, most entrepreneurs turn to debt financing like loans or lines of credit. Although debt may be unavoidable in some instances and can still allow you to successfully grow your business, there is another funding option available that is completely debt-free.

If you have an existing 401(k) or IRA from a prior employer and are eager to kickstart your business, consider leveraging those funds with a 401(k) Rollovers – often called a ROBS (Rollover As Business Startup) – by preserving your liquid cash and not taking on any debt.

How ROBS works

Rollovers as Business Startups allow you to inject your personal retirement savings into your new or existing small business on a tax-deferred and penalty-free basis. It’s not the same as pulling funds out of your retirement account prematurely (called a distribution).

Through ROBS, you’re legally allowed to roll over funds from a previous employer’s retirement account into a self-directed account that invests in your business. To do so, you must establish your new business as a C corporation, which sponsors a 401(k) plan that can purchase private stock. After rolling your personal retirement savings into the new sponsored 401(k), you can purchase stock in your business to inject it with capital!

ROBS is not a loan, so you don’t need to pay the money back – ever! The funds generated through ROBS can be used for any business-related expenses, including paying employees and yourself, for any for-profit business or franchise model.

ROBS vs. Debt for Startups

So, why would a business owner use ROBS to finance a franchise or finance a small business? One of the major benefits is that ROBS can fund a business debt-free. Provided you have enough retirement savings to completely fund your startup, you can get your business moving without needing to take out a loan or borrow against lines of credit. Here’s why that’s a good thing.

  • Fresh start out of the gates: Many entrepreneurs fear starting a business or buying a franchise because they don’t want to go in debt right away. Because debt can be difficult to get out of, it may prevent business owners from taking the leap to begin with. When funding a business using ROBS, you can get started with startup fund and working capital right away, without the looming fear of debt.
  • No struggle to qualify: Without a stellar credit history or substantial collateral, it can be difficult to qualify for a large loan to fund your business. ROBS doesn’t require good credit or collateral because you already have the funds safely in your retirement account(s) —you can access your hard-earned money in just a few weeks. All you need to do is use an IRS-approved ROBS Funding plan.
  • Less overhead: Debt can make up a significant portion of a company’s monthly overhead costs. Ultimately, this reduces the business’ net profit and minimizes the amount of money available to reinvest in growing the business. By funding your business with ROBS, you can reduce the amount you pay toward loans, so your company can become profitable faster.
  • No interest: Loans and credit not only contribute to overhead, but they also come with interest that can significantly diminish the money your business has left over. What’s worse is that interest is not benefitting your business in any way. Without debt, you know that every penny you put into the business is contributing to its growth and success.

Even if ROBS won’t be able to cover all of your business’ startup costs, it can still make a major difference in reducing the debt you need to get started. Funds that you choose to rollover can be used as the non-borrowed equity injection required for most loans, so that means using a ROBS in conjunction with a loan is totally a-okay!

Tenet Financial Group helps aspiring and current business owners evaluate their funding options and sets them on the path toward business success. To learn more about funding your business with ROBS, contact us today.