Everyone associates entrepreneurship with hard work and oftentimes, debt. For many small business owners just starting out, this is probably the case. While hard work may be unavoidable, there is a funding solution that can help ease financial burdens.
What’s the solution? In a word, ROBS.
What Is ROBS Funding?
It’s a common misconception that you can only use your retirement funds to purchase investments like publicly traded stocks, bonds, or mutual funds. In reality, you can use most retirement plans to buy a business—tax-deferred and penalty-free.
Known as a ROBS (Rollover as Business Start-ups) strategy, this funding solution is designed using long-standing provisions of the Employee Retirement Income Security Act of 1974 (ERISA) which allows entrepreneurs to use money from a qualified retirement plan to purchase or recapitalize a business.
This program is similar to buying stock in a public company, except instead you’re investing in your own privately held company.
With this funding option, you avoid having principal or interest payments, which can greatly impede your cash flow, especially in the early years of business. Using retirement funds can also help your business reach profitability faster. And because you’re investing your own money in your own business, there’s no need to use your home as security for a loan or to provide collateral.
Launching your business with ROBS funding offers additional advantages:
Which Is Better—ROBs Funding Versus Start-Up Debt?
Small business debt is a contributor to the demise of countless startups every year. Debt can take many forms, from term loans, lines of credit, small business credit cards, and more. That’s assuming your small business can even get a loan. The data shows that big banks only approve 23% of credit applications for small businesses. While small companies choose financing based on their need, there are four primary reasons these entrepreneurs go into debt for their business:
However, not all debt is good to have. There is a tightrope to walk between cash on hand and interest-heavy debt payments. This process must be handled carefully, or the new business owner may dig themselves a hole out of which they cannot climb. Too often, we see small businesses that cannot receive a loan from a traditional lender rely on high interest credit cards to purchase what they need to launch. We’ve even seen these passionate entrepreneurs use their personal credit cards—which is rarely a good idea.
The reality for any business owner is that there is both good and bad debt. Having a pile of debt can irrevocably damage a small business. If only these business owners knew about ROBS funding before seeking traditional funding from banks or other sources!
Why is ROBS funding better? If you have access to your retirement funds, a ROBS could change the outlook for your business model. Here are some of the benefits of ROBS funding:
From a business perspective, ROBS funding is a relatively risk-free way to launch your entrepreneurial effort. Notice we said, “relatively risk-free?” The risk is that your business could fail, and you could lose some or all of the money you had saved for retirement.
Other cons include:
However, if your business model is solid and you’re ready to launch, ROBS funding may be the best way to startup with no debt. And now is the best time to get started so you begin the new year as your own boss. Benetrends’ team of experts will help you explore the best funding option for your business. Schedule a consultation today.
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