One of the most popular questions we are asked by entrepreneurs interested in getting an SBA loan is, “What are my options for securing the money needed for an SBA loan?”
This is because to qualify for an SBA loan, most lenders typically require the entrepreneur to come up with a 20-30% equity injection.
For example, you need $125k to purchase a franchise and another $75k for working capital for a total project cost of $200k. The bank would require you to inject $40k to $60k towards the project and then provide you with an SBA loan for the balance.
For candidates who don’t have the savings to meet this requirement, here is one option to consider for unlocking the necessary funds:
401(k)/IRA Rollover Funding
Did you know you can use your existing retirement account to meet the equity injection requirement for SBA loans? This type of funding called 401(k)/IRA Rollover funding or ROBS (Rollover for Business Start-Ups), allows retirement funds to be used, tax-deferred and penalty-free.
To do this, a C-corporation is created along with a new qualified retirement plan designed for your corporation. After completing that step, you would roll over your retirement funds from one qualified retirement plan to the new qualified retirement plan that is designed specifically for your new C-corporation.
The new plan is now able to invest in the new C-corporation by purchasing stock in the corporation and creating funds you can use toward an SBA loan. (Note: This process is best handled by an experienced funding partner to ensure compliance with IRS requirements).
Many entrepreneurs end up bypassing the SBA loan and instead rely solely on 401(k)/IRA Rollover funding for purchasing a franchise.