This alternative method of business financing, formally called a Rollover for Business Start-up (ROBS), allows entrepreneurs with a 401(k), IRA or other eligible retirement account to use those funds to invest in a small business or franchise. This structure doesn’t trigger a taxable distribution, and since it’s not a loan, there are no monthly payments. Furthermore, this method of franchise financing makes it possible to start your new business completely debt-free if you have enough in your retirement account to cover start-up costs.
Here’s how the 401(k) business financing process works:
- The business owner forms a new corporation.
- That corporation sponsors a 401(k) plan.
- The new 401(k) purchases shares in the small business or franchise.
- Retirement funds are then rolled into the new 401(k) to invest in the business.
Rollovers for Business Start-ups can be combined with other methods of financing, including SBA loans, to help you meet your total funding needs. Many find that using their retirement funds for the down payment on an SBA loan significantly reduces out-of-pocket costs.