Using a Rollover as Business Startup (ROBS) to fund your small business is a great option if you want to minimize debt. You can put your hard-earned retirement savings to work as a true investment in your financial future! However, ROBS isn’t the right choice for every entrepreneur or business. Before you decide to use ROBS, ask yourself these important questions.
How much funding do I need?
The number-one question every aspiring business owner needs to ask themselves is how much funding they need for their startup. This number can vary greatly based on the type of business you’re launching. Franchises and independent businesses alike will require different costs for real estate, inventory, equipment, fees and more. Before you begin exploring funding options, first make a list of your assets, net worth and liquidity. While ROBS is not contingent on any of these numbers, it will be easier to consider financing products like ROBS. Perhaps you need more capital than you have in your retirement account. In that case, you might consider pairing ROBS with another form of financing, like an SBA or term loan. If you have enough in your 401(k) to completely cover your startup costs, you may be able to launch your business completely debt-free.
How much of my retirement savings will I use?
It’s also important to consider how much of your retirement savings you’re willing to invest in your business through ROBS. There is no federally mandated limit on how much you have to use in the ROBS process. However, most third-party administrators (TPAs) recommend investing at least $50,000 to make the installation and maintenance fees worth the long-term cost. Some TPAs won’t implement your ROBS account with an investment under $50,000.
If you don’t have that much saved in your retirement account or you’re not willing to put at least $50,000 toward your business, ROBS might not be an option for you. In that case, you’ll want to explore other funding sources and leave ROBS off the table.
Is this a passive or active investment?
Some business endeavors are intended to be passive investments, such as real estate investment. Others require owners to be much more hands-on—sometimes with the owner singlehandedly running the business. Consider whether your dream business is a passive or active type of investment.
According to the IRS guidelines that allow ROBS, business owners who leverage ROBS financing must be active participants in their business. This means they must work at the business like a true employee—they cannot earn income passively after making their investment. Failing to prove your work in the business may result in taxes and/or penalties on the retirement savings you used, since your ROBS account would not be in compliance.
Am I willing to take the risk?
ROBS gives small business owners the potential for tremendous success financially. By financing a business with little to no debt and growing it over time, you may be able to multiply your nest egg for retirement and live out your dream of business ownership. But it is important to remember that, like all business endeavors, it does come with some risks. Entrepreneurs should be prepared for these risks before committing to the ROBS investment.
Fortunately, there are a number of ways to reduce risk in your business. Starting with a well-thought-out business plan is a great first step. This way, you ensure there’s a market for your new business, strong customer demand and room to grow in the future.
When it’s time for you to explore financing options for your small business, turn to Tenet Financial Group. As a ROBS third-party administrator, we’ll help answer your questions and install your ROBS plan quickly and efficiently, so you can get your business open sooner. Contact us today to learn more!