Meet ROBS: What to Consider Before Dipping into Your Savings to Fund a Business

Business.com / Finances / Last Modified: February 22, 2017

Let’s take a look at ROBS financing, and whether it makes sense to finance your startup business this way.

If you’re like many small business owners, startup financing is a major concern.

It’s often challenging to qualify for a loan from a traditional lender, such as a bank while other types of loans can be expensive and restrictive. What’s an eager entrepreneur to do?

One option available to you may be a Rollover as Business Startup arrangement or ROBS for short. Let’s take a look at this type of financing, and whether it makes sense to finance your startup business this way.

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What is ROBS?

Rollover as Business Startup (ROBS) is a financial arrangement that allows you to use your retirement funds to finance your startup. In essence, you can take the funds from your 401(k), IRA, or other approved retirement account to purchase stock in your company.

Compared to other financing options, ROBS is a low-cost way to fund your startup. For this reason, ROBS is a common and accessible option for many small business owners-- but is it right for you? Before you take the steps towards a ROBS financial arrangement, take time to weigh the following considerations.

What Would I Do in Case Business Goes Under?

With a ROBS arrangement, you’re borrowing from your future. The hard facts are that most startups fail. Unfortunately, that means that the odds are not in your favor. If your business fails, you’ll lose your hard-earned retirement. If you’re an older entrepreneur who’s invested quite a bit into your retirement, it can be almost impossible to recover from this type of blow.

Have I Proven This Idea Can Make Money?

If you decide to fund your business through a ROBS arrangement, it’s still a good idea to validate your business idea as you would with any other lender. Ask yourself, what would a typical lender require of me before giving me a loan? Hold yourself to that same standard.

The most important consideration is whether your business is financially viable. Will you make money, and how? This is where a solid business plan comes in. Even though it’s not technically required if you’re self-funding, a business plan can provide much-needed clarity and a realistic roadmap to turning a profit.

Your business plan doesn’t have to be overly formal, but it should include the following components:

  • Purpose: A short and simple explanation of who you are as a company.
  • Problem: What is the problem that your target customer has?
  • Solution: How does your business solve the problem?
  • Why?: What’s the impetus behind your business?
  • Target Customer: Who is your ideal customer?
  • Competition: Who do you compete against?
  • Product: What are you selling?
  • Business Model: How will you price, sell, and market the product?
  • Team: Who’s involved in helping your company become a success?
  • Financials: What are your projected revenues and expenses, and how will it grow over time?

Your business plan shouldn’t read like a fairy tale. Be as realistic as possible with yourself, especially when it comes to financials. In fact, it’s not a bad idea to be overly cautious and conservative about your expected earnings.

Treat this document as though you were presenting it to an investor or outside lender, because that’s pretty much what you’re doing here. And evaluate it as though you were that outside lender. It’s your retirement you’re putting at risk to fund this business, so it’s important you consider it as seriously and objectively as possible.

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Have You Considered Bootstrapping Your Business?

The idea of bootstrapping your business isn’t a new one. Many entrepreneurs use their own funds to build and grow their ideas into flourishing businesses. Unlike a ROBS arrangement, most bootstrap funding comes from readily available cash accounts, such as a savings account.

Bootstrapping can keep you motivated and focused on success because it feels much more personal and visceral to pull money from a cash account. While bootstrapping may force you to start small, it can allow you to grow your business in a steady and manageable way.

In either case, your goal should be to keep costs as low as possible to begin with and focus on growing your revenue. That might mean developing a minimum viable product (MVP) or landing your first few customers.

Should I Finance With ROBS?

If you’re looking into financing with ROBS, know that it is not for everyone. First of all, you must have a substantial amount in your retirement account to fund your business. And if you have the money, you also have to be willing to risk these funds on an idea that isn’t guaranteed to be successful.

Another downside to ROBS financing is that if done incorrectly, you risk getting in trouble with the IRS and may potentially be faced with an audit. For that reason, you’ll want to work with a ROBS provider that specializes in this field.

The right provider will know how to get you set up lawfully, so you don’t face legal trouble later on. The good news is that, when done correctly, ROBS is relatively inexpensive compared to other forms of startup financing.

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