For those small business owners seeking loans, often the first thought is to apply for a traditional commercial loan. The problem however then becomes, that with loan amounts frequently in the hundreds of thousands, the down payments required could very well make any such business loan financing our of reach. The SBA does offer an alternative (ten percent down in some instances/), but the lenders themselves are usually still requiring at least 25% down before issuing a loan. All told, to procure business loan financing, you could be looking at having to come up with 30k plus depending on loan size.
A recent survey suggests that one of the major obstacles that small business owners are facing is their inability to get business funding. And one of the major hurdles concerning that is the fact that they simply don't have the money upfront to put down on a loan. So even those with stellar credit scores, those who have been in business for more than two years and have a decent financial history still are unable to get business loan financing because they lack the cash for the deposit. That said, there are creative ways to work around this, so that as a small business owner you may still be able to get a loan. Using a 401k for example, to help with business loan financing might be one avenue for you to check out.
Understanding 401(k/) business financing
Also known as Rollovers for Business Start-ups (ROBS/), 401(K/) business loan financing is allowing you to use your retirement funds toward a business without incurring tax penalties. First off, you need to have at least 50k in an account that allows for rollovers—so for instance an IRA or 401k will both work. The process of getting business financing based upon this is relatively fast and easy, taking just a couple of weeks at the most. And as ROBS isn't a loan, you are not making any monthly payments.
Now, when you use ROBS as your down payment on a loan, you are likely going to be able to qualify for the loan more easily as you now have the down payment required. Essentially what happens is the funds from a retirement account are rolled over within the context of this ROBS transaction. The cash needed for your SBA loan is there, plus you are still protecting your savings. Also keep in mind, that by using retirement funds for a down payment as far as business loan financing is concerned, you do have the ability to put down more money. This will help minimize the amount you pay back on the actual business loan itself throughout that loan. So all told, this bigger down payment toward your SBA loan gives you more leverage in terms of your buying power as well as more flexibility overall. A recent study showed that those entrepreneurs who used ROBS funding for a down payment on an SBA loan had access to upwards of 150k, which is significantly more than the 50k many other business owners reported.
SBA Loan and ROBS What You Need to Know
To initiate a ROBS transaction, you first roll over 100% of your original retirement account into a new 401k which will be set up for a C corp. While this may seem a daunting task, a third-party ROBS provider can easily help you with all aspects of the process. Once the money is in fact in the new account, the funds can be used for any business-related purpose, including the down payment on an SBA loan or any such business loan financing.
Benefits of Using ROBS
In some cases, for some business owners using the funds from their 401k or IRA and rolling them into a ROBS account could be the only way they stand a chance to get funding. There are additional benefits to going this route as far as getting the down payment for a commercial loan; these include:
- Funding promptly — Because you can get to your retirement funds in just a couple of weeks, the entire process is streamlined. And when it comes to keeping up with the pace of business, faster usually is better.
- Protect Your Savings — With ROBS you are protecting your savings. This way too if things come up, unexpected things, you still have cash on hand. And since the ROBS funding is not a loan, you aren't obligated to make monthly payments back into the account.
- As mentioned, it could give you a larger down payment — This of course makes your loan application for business financing all the more attractive. More cash down equals less of a risk for the lender. And you therefore could qualify for an even larger loan amount.
The good news is that there is not a minimum credit score required, nor does collateral need to be involved. Requirements include:
- You need to have at least 50k in one of your pre-tax retirement accounts. This could be an IRA, 401k, 403(b/), Keogh, or SEP, among others.
- The company you are funding has to be active and operating. So it cannot be used for a passive investment.
- As the owner of the retirement funds, you also have to be an active part of the company being funded, in whatever capacity.
If this is an option you want to explore further, then you first want to look into what type of business loan financing you might qualify for, what's more, what kinds of funding options would work best for your small business.
First Union Lending has been working with numerous small businesses across the US—we provide business loan financing options custom-tailored to suit an individual company's needs. From short term loans to merchant cash advances, among other products, we likely have the ideal lending solution for you. Call today and let's get started!