IRA Financial Blog

Debt Financing Alternative for Business Owners

finance your business with robs solution
Key Points
  • Business owners in need of funds can turn to banks, use SBA loans, or micro-loans if they qualify.
  • However a recent Gallup poll revealed that most business owners are very uncomfortable with their debt.
  • To avoid taking out a high-interest loan, use the Rollover as Business Startup solution and tap into your retirement funds.

Starting your own business is a difficult enterprise. One of the biggest challenges business owners’ faces is finding the capital to get started. When it comes to obtaining funds, you have a few options.

As you may already know, you can borrow money from an outside source and promise to pay back the principal along with interest. By doing this, you are essentially taking on debt. There are a number of sources that provide loans to small businesses, to be repaid with interest.

Debt Financing Options for Business Owners

Banks: Bank loans are the most common, and typically the best source if you qualify for a loan. Of course, not everyone qualifies. Furthermore, banks have very strict requirements that are difficult for business owners to meet if they are just starting out.

SBA Loan: If you don’t qualify for a bank loan, business owners can obtain a Small Business Administration loan guarantee. However, SBA loans can be very time-consuming; time that can be better spent on your business/business concept.

Micro-Loans: If you don’t have the time to apply for a SBA loan, as they are very paper-intensive, you can try your hand at micro-loans. Unlike a loan from a bank, micro-loans are designed for start-ups.

Alternative to Debt-Financing

Loans have a negative connotation because you are essentially taking on debt. Oftentimes, business owners take out high-interest loans in order to fund their business venture and have trouble paying back the principle and the interest. A Gallup poll found that 36% of U.S. small business owners who borrowed money are “very” or “somewhat” uncomfortable with their debt. The poll also reveals that 49% of small business owners find it “extremely difficult” to pay off their current debt.

There’s an old adage that you may know: “it takes money to make money.” But what if you could use your own money, or more specifically, your retirement funds? This is a possibility with the Rollover as Business Startup (ROBS) Solution.

What is the Rollover as Business Startup Solution?

Also known as the ROBS solution, it is an IRS and ERISA approved structure that allows individuals to invest their retirement funds into a new or existing business/franchise. You can use funds from an IRA or 401(k) tax and penalty-free.

If you don’t want to get into debt, the ROBS Solution is a great alternative for business owners or individuals who wish to start their own business. If you already have your own business and need capital, you can tap into your retirement savings for immediate funds.

Although you can use all the funds in your retirement account with the Rollover as Business Startup Solution, be aware of the risks associated with this structure. As you may know, 50% of new businesses fail within the first five years, according to the Small Business Administration.

So if you decide to use ROBS as an alternative to debt financing, understand the disadvantages.

And of course, recognize the many advantages it offers business owners:

  • No Debt: The ROBS solution isn’t a loan, so you don’t have to repay it.
  • No Penalties: You will not incur tax and penalty on early withdrawals. Even if you aren’t age 59 1/2, you can utilize the ROBS solution.
  • Receive Funding: You quickly gain funds for your business. You can put the money towards hiring employees, purchasing inventory, creating brand awareness, etc.

That is the beauty of the Rollover as Business Startup solution. It’s a great alternative for business owners who don’t want to incur debt they may struggle to repay. Another option for Self-Employed individuals is a Solo 401(k) Loan. Contact us to learn more today!

For more information on the ROBS solution, contact IRA Financial directly at 800-472-0646.


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