Compare ROBS 401k vs SBA loan for Business Financing: 7 Key Differences

Many entrepreneurs that we speak to are considering different options to finance the startup or purchase of their business including comparing a ROBS 401k (Rollover as Business Startup) and a loan backed by the Small Business Administration (SBA Loans).

There are some important differences between ROBS 401k Business Financing and an SBA loan.   Depending on your business plan, this may make one option more attractive than another.  Of course, many business owners choose to use both options – effectively using a ROBS 401k to fund the down payment on an SBA Loan.

Can my business afford to make the loan payments?

When you use a ROBS 401k plan to invest invest your retirement funds in your own business, this investment is not a loan from your 401k.  This means that there is no requirement for you or your business to make loan payments.  On the other hand, your business will be obligated to make loan payments on an SBA loan.  As a result, it will be important consider whether your business can afford to make loan payments.

How quickly do I need the money?

With a ROBS 401k plan, you will typically have access to your funds in 3-4 weeks.  While an idea candidate may be able to obtain an SBA loan in a month, you should plan on taking a least a few months to close on an SBA loan.

What happens if I sell the business?

Since a ROBS 401k plan is structured as a stock purchase (rather than a loan), you will own a significant amount of your business through your 401k plan.  If you fund your business via an SBA loan, you will not give up an ownership in your business to obtain the loan which means that you may own 100% of your business in your own name.

Practically, this difference can have a big impact of what happens if you decide to sell your business in the future:

  • If you own a significant portion of your business via your 401k, then a large percentage of the sale proceeds (after paying expenses, creditors, etc.) will flow back to your 401k account.
  • If you own 100% of your business in your own (e.g. because you financed it via an SBA loan), you will receive 100% of the sale proceeds.

What happens if my business fails?

In order to qualify for an SBA loan, you will need to personally guarantee the loan.  This means that if the business fails and is unable to pay back the loan, you will be personally obligated to pay back the loan including putting your personal home and other assets at risk if you are unable to personally satisfy the loan.  In contrast, if you funded your business via a ROBS 401k, there is no personal guarantee requirement such that while you might deplete your retirement savings you won’t put your home at risk by virtue of funding your business via a ROBS 401k.

ROBS 401k vs SBA loan – Key Differences

 ROBS 401kSBA Loan
Credit CheckNoYes
Personal GuaranteeNoYes
Down PaymentNoYes
Timing3-4 weeksMonths
Loan PaymentsNoYes
TermNo10 years
Interest RateNOPrime + 2.25-2.75%

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About George Blower

I have the privilege of educating our clients about our products and services so that they can make informed and confident decisions about their financial future. Prior to joining My Solo 401k Financial, I served as the general counsel for a subsidiary of a Fortune 500 financial services company. Learn more about George Blower and My Solo 401k Financial >>

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