How to use ROBS to get a financial advantage for your business

This is a sponsored post written by me on behalf of 401(k) Business Financing for IZEA. All opinions are 100% mine.

The relationship between startups and banks is – more often than not – a tenuous and uneasy one.

While many business owners view banks as “too big to fail,” thousands of those same entrepreneurs wanting to get their small business ventures off the ground have been rejected as “too small or risky to bother with.”

If only budding entrepreneurs could fund their own business financing, that would be living the dream, right?

401(k) Business Financing:  A unique twist.

Talking to some of my friends at Guidant Financial the other day, they reminded me of the rollovers for business startups (ROBS) arrangement, more commonly known as 401(k) business financing.  With ROBS, you have a tool to invest in yourself using your own retirement funds tax penalty-free; it can eliminate dealing with bank loan officers or asking relatives for money.

ROBS is one of the important areas of specialization at Guidant Financial and the last figures I’ve seen from them indicate that they have helped more than 14,000 entrepreneurs finance their businesses to a tune of more than $4 billion.

If you’re familiar with financial lingo, the word “rollovers” has probably given you a clue about the nature of this financing arrangement. The way it works is that you use funds from an eligible retirement account – typically a 401(k) or IRA – to invest in your business.

You probably know the various penalties for taking money out of retirement accounts before you hit age 59 ½ – those don’t apply to ROBS financing. Further, unlike borrowing from your 401(k), you don’t need your current employer’s approval, nor do you need to pay the rollover back.

Debt Free Financing

Let me return to the “rollover” part of this arrangement. ROBS is not borrowing from your retirement account. As you’ll see when I list each step in the process below, with ROBS, your retirement money is ultimately used to invest in your small business. Here are the basic steps.

  • You form a C corporation. ROBS cannot be used with S corps, sole proprietorships, or LLCs.
  • You create a retirement plan for your new C corp. This is the recipient of the “rollover.”
  • You transfer funds from your old retirement account to your new company retirement plan.
  • Your C corp’s retirement plan purchases stock in your business. (By the way, you don’t have to use all of your retirement money, nor does this have to be all the money you use for your business. If you want to hit up relatives or apply to the bank, you can do those things too.)
  • Your business can use the funds from the stock purchase.

The pros at Guidant tell me that it takes about three weeks on average to complete the ROBS process. And while you don’t have to go through a painful application process like would be required for a loan, you do need to have a minimum of $50,000 in eligible retirement funds and be an active employee of your small business.

Also, while the “S” in ROBS stands for “startups,” that’s a little confusing. You can use 401(k) business financing to buy a franchise or existing business, or in many cases to capitalize your existing business.

I can’t go through all the “ins and outs” of ROBS financing here, but before I close, I want to take a step back and look at the bigger picture for a moment.

While there are a host of advantages to ROBS financing, perhaps the biggest is that it allows you to eliminate or dramatically reduce borrowing, which means that you won’t have “debt service” eating away at your cash flow every month. You cannot overestimate the importance of this.

We know that 20 percent of all new small businesses fail in their first year and more than half fail by their fifth year. However, Guidant Financial found that about 81 percent of their clients were still operating after four years, or had pulled off a successful sale.

When you’re ready to go ahead with your new small business venture, grab every advantage you can get. If you have wisely set aside funds for retirement, they might represent the single greatest advantage available to you.

Don’t believe me?  Check out what the owners of Beach House Miracles have to say!

Small Business Financing 

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