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Starting a small business or buying a franchise with a lot of debt is a scary thing for many entrepreneurs. Debt often comes with many hurdles, from strict qualification requirements to high overhead that prevents a business from growing. For this reason, a lot of entrepreneurs look for debt-free financing methods—but this can be challenging, too, when you consider the vastly different options available.

Some of the most common debt-free financing methods include equity investment and small business grants, but these aren’t the right choices for a lot of startups. Instead, one debt-free capital tool allows you retain the greatest control over your business’ financials and operations: Rollovers As Business Startups (ROBS). And, spoiler alert, ROBS can be used for existing small business and franchise capitalization too, so don’t let the word “Startups” turn you off right away.

What is ROBS?

ROBS is a debt-free business and franchise finance method that allows you to roll funds from an existing retirement savings accounts (like a 401(k), traditional IRA or other pre-tax account) into a newly-formed self-directed 401(k) and use those funds to capitalize your business.

By establishing your new business as a C-corporation, you can use your new 401(k) to invest your retirement funds into the business. After you’ve purchased stock in your startup, your business will benefit from a capital injection that you can use to secure a business location, buy supplies, pay salaries and much more.

Why ROBS trumps other debt-free financing

Although ROBS is one of many potential debt-free financing methods available to small business owners, it comes with some unique benefits that make it an appealing choice.

  • Retain full control over your business: Other forms of debt-free financing, such as equity investment, bring others into the decision-making process for your business. Having investors at the table reduces the control you have over your own company and can potentially lead it down a path you don’t love. With ROBS, the only person you have to answer to is yourself! You retain full control for as long as you want it.
  • There’s no competition: Securing debt-free financing is often a competitive process, since interest-free funding is harder and harder to come by. However, there is no competition involved with ROBS. Since you’re using your own retirement funds to build your business, you don’t need to stress about losing potential funding to competitors.  
  • There are no penalties: Many people fear using their retirement funds for their startup because they think they’ll have to pay penalties. In reality, ROBS is a penalty-free financing method as long as it’s executed properly. You won’t have to pay extra to access your retirement funds!
  • Your business runs on the back of your hard work: Some entrepreneurs shy away from building their startups with debt-free financing because they don’t like the idea of asking others for money. Through ROBS, you’re using your own money to make your business dreams come true—no crowdfunding, grant applications or venture capital required. At the end of the day, you’ll have the satisfaction of knowing that you’re putting your own hard-earned dollars to work.

Add to the above benefits that ROBS is quick, generally 3-5 weeks to complete the process, and ROBS money can also be used as the non-borrowed equity injection for most loans, in the event you also do need to have debt-related funding for your business.

If you’re interested in launching your small business without debt holding you down, consider using the ROBS financing method. At Tenet Financial Group, we help aspiring entrepreneurs establish and maintain their self-directed 401(k)s. Contact a consultant to get started!