Starting a Business Debt-free: Benefits of Using 401(k) Business Financing

When it comes to small business financing options, it’s usually traditional funding methods that come to mind: working capital loans, SBA loans, business lines of credit, etc. But did you know an alternative option exists that’s allowed thousands of entrepreneurs to launch businesses debt-free? It’s called a Rollover for Business Start-up (ROBS), and it enables you to leverage your own retirement assets to buy a business without having to pay any tax penalties or get a loan.

The ROBS arrangement was made possible by the Employee Retirement Income Security Act (ERISA) of 1974 and has since made the dream of business ownership a reality for many. Here are some of the key benefits of using retirement funds to invest in a business:

  • Launch your business with equity — not debt. By funding your business with assets you already possess, you won’t have to make monthly repayments or worry about interest rates, allowing you to make a profit sooner. Plus, because the ROBS structure doesn’t trigger an early withdrawal penalty or other fees, you can put more of your money to work for you.
  • No collateral/credit requirements. The only requirement for 401(k) business financing is to have a ROBS-eligible retirement fund(many plans qualify, including 401(k)s, traditional IRAs, 403(b)s and others) with more than $50,000 in rollable assets (we’ve found lesser amounts aren’t as advisable/worthwhile). As such, you won’t need to jeopardize your home or personal credit as collateral unless you’re applying for other, more traditional business funding methods — which brings me to my next point.
  • You can use ROBS funds as the down payment on a loan. If you plan on going the more traditional funding route and pursuing a business loan, you can avoid pulling from your personal cash reserve by using the money from ROBS as your down payment.
  • Invest in yourself, not the stock market. While the stock market may be doing well right now, it’s just a matter of time until its next dip — which means less money for investors. With such uncertainty, why not use your money to invest in yourself and your dreams? I’ll bet that’s a much better investment to make.

Just like any investment, using retirement assets to start a business can carry some risk, but for many, the ability to own a business and control their own future outweighs any downfall. Want to see if you qualify? Get your business financing quote now.