Now more than ever, lenders want borrowers to have “skin in the game,” and sometimes that is the biggest difficulty. For entrepreneurs who want to preserve their available cash (or might not have enough cash) but have pre-tax retirement funds, a Rollover could be the answer! By Diane Rosenkrantz

Now more than ever, lenders want borrowers to have “skin in the game,” and sometimes that is the biggest difficulty. For entrepreneurs who want to preserve their available cash (or might not have enough cash) but have pre-tax retirement funds, a Rollover could be the answer!

Rollovers, also known as a Rollover as a Business Startup/ROBS, originated in the 1970s, has gained more attention and become increasingly common in the last decade. A Rollover offers many benefits:

  • It’s not a loan; repayment isn’t required
  • It’s not a taxable distribution and there is no early withdrawal penalty
  • It can be used for all types of business expenses such as equipment, inventory, marketing, and salary (including salary for the business owner)
  • It can be used for any for-profit business
  • It can be used to satisfy both equity injection and post-close liquidity

Perhaps the biggest benefits of a Rollover are:

  • You are using equity, putting your business in a better position from day one
  • You get access to these funds very quickly, on average four to five weeks

The Rollover funding option consists of “rolling over” pre-tax retirement funds such as a 401(k), IRA, Keogh, Thrift Savings Plan (TSP), or 403b (among other options) to your new company 401(k) plan and investing those funds in the new business – your franchise! More than one pre-tax account can be used, such as spouse’s or business partner’s, and there is no limit to the amount that can be rolled over.

This type of funding has some stipulations. First, a C-Corporation must be formed. Second, a minimum of $50,000 is recommended because of the fees involved with the process. Other considerations should be explained by your Third-Party Administrator (TPA).

You can find more small-business tips by visiting the Tenet Financial Group blog at tenetfinancialgroup.com/blog.

– Diane Rosenkrantz

Diane Rosenkrantz has been a senior consultant with Tenet Financial Group for more than a decade, specializing in 401(k) Rollovers, SBA Loans, Unsecured Lines of Credit, and more. Her career includes 30-plus years in consulting, customer service and the pension/insurance industries. Diane can be reached at diane@tenetfinancialgroup.com and 413-754-3298.