Dreaming of becoming a business owner but feel you don’t have enough money? If so, there is a surprising solution that could solve your problem – using your retirement funds – better known as 401(k) business financing or Rollover as Business Start-Ups (ROBS).
Before you get nervous about depleting your retirement fund, read on. ROBS can allow you to use your retirement money to fund your company without early withdrawal fees and tax penalties. And, as your company performs well, your profits can go back into the account to provide retirement funds for both you and your employees.
“Most small business owners and employees don’t have the benefit of a corporate retirement 401k account, but this makes it possible,” said Merri Cronk, owner of FranNet Texas Southwest.
According to Cronk, another great benefit of ROBS is control. “One of my clients recently shared that he thought ROBS was a good idea because he wanted control over how those funds would perform rather than have them in the volatile market.”
For other aspiring business owners, ROBS offers them the opportunity to get into business without going into debt.
“It’s a great fit for people who have a philosophy of investing in themselves and appreciate the benefits of using equity vs debt to buy a business,” said David Nilssen, CEO of Guidant Financial, a company that specializes in helping people find the right financing to start their small business or franchise.
Another great advantage of ROBS is that it’s very fast. It can be completed in about three weeks, which is a significant benefit to someone buying a business in a competitive environment.
ROBS is also much easier to get because it’s using your own money. Unlike other types of funding methods, your credit score, past experience or on-hand collateral won’t impact your ability to get the funds.
While ROBS may seem too good to be true, there is a caveat. As with any investment, there is some risk of losing the funds if your business doesn’t do well. The good news about this risk is that you have the power to control it to an extent. If you do your research upfront and have solid business plans that you are extremely confident in, the risk is fairly low.
One great way to reduce the risk is to use the money to invest in a franchise, which already has a proven track record of success.
If these philosophies resonate with you and ROBS seems like an appealing option, you’re probably wondering if it would work for you and how much money you need in your retirement account to set one up.
According to Nilssen, ROBS works for individuals who have capital in an IRA, 401k or other qualified vehicle. He says most ROBS transactions are for 49 percent of the client’s personal equity, which is usually between 50K and 250k. So, you must have worked long enough to save that much money. That means that most ROBS candidates are over 40 and have 10+ years of corporate experience. They also have great credit.
For more information on franchise ownership and whether ROBS is a good idea for you or not, call Merri Cronk at 512-329-2613.