Can You Use a 401(k) as an SBA Loan Downpayment?

Getting the money for a down payment can be one of the most challenging parts of applying for an SBA loan. However, if you have a 401(k) account, or another approved tax-deferred retirement account with at least $50,000 in it, you may be able to use those funds as a down payment on an SBA loan— all without incurring any tax penalties. Here’s how.

Rollovers as Business Start-Ups (ROBS) Allows Borrowers to Use Retirement Funds for SBA Loan Down Payments

If you have an IRA, 401(k) or 403(b) account, the U.S. government’s Rollovers as Business Start-Ups (ROBS) policy permits individuals to use their retirement funds to start or buy a business in only a few weeks. Plus, since there is no loan involved, no credit requirements apply. Being able to access tax-deferred retirement accounts often means borrowers can make larger down payments, which can increase the amount of funds they can get, and may also mean better interest rates.

How ROBS Actually Works

In order to make use of ROBS, you’ll have to take several important steps. The first typically involves creating a new business as a C corporation. That C corporation will then create a new 401(k) plan, and the funds from your previous 401(k), IRA, or other tax-deferred retirement account will be rolled into the new corporation’s 401(k). Next, the 401(k) will buy stock in the C corporation, providing it with cash that can be used for your SBA loan downpayment. Since the process can be somewhat complex, you’ll likely want to use a third-party ROBS consultant or advisor to help guide you through it with as few delays as possible.

How Do I Qualify for ROBS?

In order to be eligible for a ROBS transaction, a borrower will need to:

  1. Have at least $50,000 in an approved, tax-deferred retirement account, typically a 401(k), 401(b), or IRA (Roth IRAs don’t qualify).

  2. Be an “active employee” of their company (in any role), not simply a passive investor.

  3. The company itself must also be actively involved in a specific business, and cannot simply invest passively in another business or financial instrument.

Typically, ROBS transactions can be completed in as little as 3 weeks, making them a great way to get down payment funds for businesses that need them fast. Plus, using tax-deferred retirement funds for business down payments helps borrowers maintain the amount of cash they have on hand for emergencies, working capital, and other expenses that may come up in the process of running a business.

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