What are ROBS? 

As a business owner, securing funding for your venture can be daunting. One way to pay for your startup costs is through a Rollover for Business Start-ups (ROBS), which allows you to invest your retirement savings in your new business. 

In this guide, we’ll break down how ROBS financing works, the potential benefits and risks, and how to decide if it’s the right choice for you and your company. 

What are ROBS, and how do they work? 

ROBS is a financing method that allows entrepreneurs to use their retirement funds, like a 401(k) or IRA, to invest in their business without incurring early withdrawal penalties or taxes. 

A ROBS is not a retirement plan withdrawal — funds are rolled into a new retirement account. The funds in that new account are then invested in your business. 

Here’s a step-by-step breakdown of how ROBS works:

1. Establish your business as a C corporation. 
2. Create a new 401(k) plan for the corporation, allowing private stock purchasing.
3. Your funds are rolled over from your retirement account into the new 401(k) plan.
4. The 401(k) plan purchases stock in the C corporation, providing the business with the funds needed to operate.
5. The funds can then be used on business expenses, like purchasing equipment or covering operating costs.

Can you use a ROBS for an existing business?

ROBS is primarily used for starting a new business. But, it can also fund an existing business in certain situations. 

• Buying out a partner: ROBS can provide the necessary funds if you need to buy a business partner out.
• Expansion: ROBS can fund the expansion of an existing business, like opening a new location or adding a new product line.
• Working capital: In some cases, ROBS can be used to provide money to help fund day-to-day operations. 

Is ROBS financing right for your business?

In some ways, ROBS can be an advantageous way to fund your business. Unlike a loan, you don’t have to pay any interest or monthly payments with a ROBS. It allows owners to tap their retirement savings without taxes or penalties. 

But it can be pretty risky. Owners can potentially lose their retirement savings if the business fails. There also may be some transaction fees, depending on the administrator who sets up the ROBS.

There are a few things to consider when determining if ROBS is right for your business:

1. To use ROBS, you must typically have at least $50,000 in your retirement account. 
2. ROBS is only available for C corporations. If your business is structured differently, like an LLC or S Corporation, you may need to consider other funding options. 
3. Investing your retirement savings in your business comes with risk. If your business fails, you could lose your entire nest egg. 
4. Using your retirement funds for your business may impact your long-term finances and retirement goals. 

Risks of ROBS financing

While ROBS can provide a valuable source of funding for your business — without interest or tax — it’s essential to understand the risks involved.

• Compliance issues: ROBS transactions are subject to strict IRS and Department of Labor regulations. Failure to comply with these regulations can result in significant penalties and taxes.
• Business failure: As mentioned before, you risk losing your retirement savings if your business fails. The IRS reports that most businesses funded with ROBS either failed or had high bankruptcy rates, liens, or corporate dissolutions. 
• Opportunity cost: By investing your retirement funds in your business, you may miss out on the potential growth of your savings if you had invested in the stock market. 
• Complexity: Setting up and maintaining a ROBS structure is complex and may require the assistance of financial and legal professionals, which can add to your business’s expenses.

Alternatives to ROBS financing

While ROBS financing can be a solid option for some small and mid-sized businesses, it’s not the only path to getting funding. Several alternative financing options are available, each with its advantages and disadvantages. 

Business loans

Business loans are one of the more traditional financing options to provide the capital you need to start or grow your business. There are several types of business loans, including SBA loans, term loans, and equipment financing. 

SBA loans, backed by the Small Business Administration, typically offer favorable terms and rates but can be time-consuming to apply for. Term loans provide a lump sum of cash that is repaid over a set period. Equipment financing allows you to borrow money specifically to purchase equipment.

Business credit card

Business credit cards offer a more convenient financing option — you can continuously make purchases up to a credit limit.  Many business credit cards also offer rewards, providing additional value for your company. 

But paying off your balance in full each month is important to avoid high interest charges. Also, be aware that business card debt can impact your credit score, so staying on top of your payments is important. 

Business lines of credit

A business line of credit is a flexible financing option that allows you to borrow funds up to a preset credit limit. Unlike a term loan, you only pay interest on the amount you borrow, and you can draw funds repeatedly as long as you make payments and stay under the credit limit. 

A business line of credit is a good option for businesses with fluctuating cash flow needs. But, they often come with variable interest rates, which makes them more expensive. You may also be required to provide collateral or a personal guarantee to secure a business line of credit.

Peer-to-peer lending

Peer-to-peer (P2P) lending platforms connect borrowers with individual investors to fund their businesses. P2P loans can be a good option for businesses that may not qualify for traditional bank loans, as they often have more flexible requirements. 

You may be able to get funded quickly with a P2P loan, sometimes in as little as a few days. Keep in mind that P2P loans often have higher interest rates than other types of loans. You may also have to pay fees. 

Crowdfunding

With crowdfunding, you can raise money from many individuals, typically via online platforms. There are several types of crowdfunding: rewards-based, equity-based, and debt-based. 

With rewards-based crowdfunding, backers receive a product or service in exchange for money. Equity-based crowdfunding allows funders to receive a share of ownership in the company. Debt-based crowdfunding, also known as crowdlending, allows businesses to borrow money from a group of investors. 

Personal loan for business

You may also be able to get a personal loan for your business, especially if you have a strong personal credit score or collateral to offer. Unlike business loans, you don’t need to prove that you’ve been in business for a set number of months, have an established business credit score, or provide positive cash flow. 

But using a personal loan for business means you’re responsible for repaying the debt, even if your business fails. 

Grants

Grants from government agencies, nonprofits, and corporations can fund businesses that meet specific criteria. Grants don’t need to be repaid, so you can use them to fund your venture without debt. 

However, grants can be highly competitive and often have strict requirements for using the funds. 

How Swoop can help 

ROBS is just one of many financing options available. That’s where Swoop comes in. Our platform is designed to connect business owners like you with various funding sources, including ROBS providers, traditional lenders, and investors. 

With Swoop, you’ll gain access to personalized funding recommendations tailored to your business’s unique needs and goals. 
We understand that every business is different, and what works for one may not work for another. That’s why we take a holistic approach to funding, considering your industry, growth stage, and financial history to help you find the best fit. Register with Swoop to find the best loan for your business needs, and let us guide you through the application process.