Head to head
401(k) business financing (ROBS) vs SBA 7(a) loan
Both fund a business purchase. One spends money you already have and keeps no lender involved; the other borrows money you do not have and keeps a lender involved for a decade. They are also routinely used together.
| 401(k) business financing (ROBS) | SBA 7(a) loan | |
|---|---|---|
| Typical amount | Typically $50,000 upward, limited by your rollover balance | Up to $5 million |
| Cost | No interest or repayment. Setup and ongoing plan administration fees apply. | Prime + 3% to prime + 6.5%, by loan size |
| Time to funding | 3-6 weeks | 30-90 days |
| Term | No term. The money is equity, not debt. | Up to 10 years, 25 with real estate |
| Relative expense | $$ | $ |
Cost bands are editorial judgements expressed in APR-equivalent terms so products quoting factor rates and discount fees can be compared with products quoting interest. They indicate relative expense, not quotes. Methodology.
401(k) business financing (ROBS)
Usually chosen when
- You have retirement savings but little liquid cash for an SBA equity injection
- No lender will fund the business at inception
- You want no monthly debt service in the early months
- You will work in the business full time, which the structure requires anyway
SBA 7(a) loan
Usually chosen when
- You have cash for the injection and would rather not stake retirement savings
- The business will service debt comfortably from day one
- You want to keep the retirement account diversified and separate from the business
- A C corporation and a permanent 401(k) plan are not structures you want to run
Common questions
- Which is riskier?
- They fail differently. With an SBA loan the downside is a defaulted debt and a personal guarantee for a known amount. With ROBS the downside is retirement savings reduced to nothing, with no creditor to negotiate with because you were the investor. The IRS's own compliance project reported that most ROBS businesses failed or were heading that way.
- Can I do both?
- Yes, and it is a common structure among franchise buyers. Providers routinely arrange the rollover and the SBA loan as one engagement.
Other comparisons
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