Why Not Use Both?
Consider using multiple funding sources
by Mariah Bohn
You’ve probably heard the buzzword “diversification” in relation to the stock market; the practice of allocating investments in various sectors — banking, real estate, tech, energy, etc. — to reduce risk. The reasoning is that by investing in areas independent from the same market forces as each other, their differing reactions will protect you from losing the entirety of your investments to the same economic event.
The same approach is worth considering when funding your business. It’s important to think beyond merely accessing the funds needed to open the doors. You should weigh how your funding strategy will impact both your business and personal finances long-term. Rather than opting for a single method of funding, you might benefit from diversifying—by using a combination of retirement savings and a business loan.
A new business owner will typically choose one of these two options for funding:
Option 1: ROBS (Rollover as Business Start-up)
The ROBS program allows you to access retirement funds from a 401(k), individual retirement account, or another eligible retirement account without having to pay early withdrawal penalties or income taxes. ROBS has no credit-score requirements, needs no collateral, and incurs no debt, which improves the cash flow for the business. It is also generally the quickest way to obtain money.
Option 2: Business loan
You can access up to $5 million through the Small Business Administration (SBA) loan program for start-ups, acquisitions, expansions, and working capital. Business owners who may not qualify for conventional loans may be eligible for SBA loans because the government guaranty helps alleviate some of the lender’s risk associated with start-ups. Conventional loans, which are primarily used for expansions and upgrades, are available to strong borrowers with prior business ownership experience.
Option 3: ROBS + business loan
If you have retirement savings and meet the eligibility requirements for a business loan, you can combine these two methods to ensure more flexibility as your business grows.
Here are some benefits of the combined, or diversified, strategy:
- If you supplement a business loan with the ROBS as an equity injection, you’ll have access to more total funds but have a smaller loan and lower monthly payments than if you financed the business solely with a loan.
- You can use a business loan to supplement the ROBS, reducing the amount taken from retirement funds.
- You’ll have a reserve of available funds for future expansion. For instance, if you’re considering a multiunit purchase, this method preserves liquidity for financing subsequent units.
Many factors contribute to determining the best funding solution for each situation. To help you understand all of your options and the longterm impact of each, contact the franchise funding experts at FranFund for a free consultation: info@franfund.com or 877-FRANFUND or visit bit.ly/frandfund-fd.