Introduction: The Two Funding Tools Every Business Buyer Should Understand
For most aspiring business owners, the biggest barrier between ambition and actual ownership is not finding the right business or gaining experience. It is securing the capital needed to complete the purchase. Whether someone is buying a franchise, acquiring a profitable local company, or launching a new venture, the amount of funding required almost always exceeds what personal savings can support.
In 2026, entrepreneurs have more financing options than ever, yet most people understand only a small fraction of what is available. Among the most important but often misunderstood funding tools are SBA loans and Rollover for Business Startups, known as ROBS. These are commonly presented as competing strategies, but that view oversimplifies how real transactions are structured. In practice, SBA loans and ROBS solve entirely different challenges. Together, they create one of the most powerful and efficient paths to business ownership available today.
How Entrepreneurs Commonly Fund a Business
Business buyers generally explore a variety of funding approaches before arriving at formal financing. Some turn to family members or friends. Some bring in private investors who ask for equity or decision-making power. Others turn to venture capital, although venture investors tend to focus on technology and high-growth startups rather than traditional businesses.
When it comes to buying established companies, acquiring franchises, or entering industries such as hospitality, home services, manufacturing, or logistics, entrepreneurs typically end up with two institutional funding tools: SBA-backed loans and the use of retirement funds through ROBS. Most buyers eventually discover that the question is not which one to choose, but how to structure them together in a way that strengthens the deal, reduces out-of-pocket requirements, and improves approval odds with lenders.
Understanding SBA Loans: The Backbone of Traditional Business Financing
An SBA loan is not a loan issued directly by the government. Instead, it is provided by a participating bank, credit union, or non-bank lender and partially guaranteed by the Small Business Administration. This federal guarantee reduces lender risk and enables borrowers to access capital on better terms than conventional loans.
SBA loans are used to finance business acquisitions, buy franchises, acquire real estate used for business operations, or purchase large equipment portfolios. Despite their popularity, approval is never guaranteed. Lenders evaluate the business’s financial health, historical performance, cash flow projections, the borrower’s credit profile, operational experience, collateral, and even the industry as a whole.
A significant number of otherwise qualified applicants are denied for a single reason: they cannot meet the equity injection requirement. This is the minimum down payment required by lenders, typically between 10 percent and 30 percent of the purchase price. Many entrepreneurs are operationally strong and creditworthy but simply do not have the liquid capital needed. That is where ROBS becomes a game-changing tool.
What ROBS Is and Why It Exists
ROBS, or Rollover for Business Startups, is a legal structure that allows an entrepreneur to invest retirement funds into a business they will actively operate. It avoids income taxes and early withdrawal penalties by treating the investment as a rollover into a qualified plan rather than a distribution.
ROBS follows a formal statutory framework. The business is organized as a C Corporation. The corporation adopts a qualified 401(k) plan. Retirement funds from an existing account are rolled into the new plan, and the plan invests in the corporation by purchasing newly issued stock. The company receives cash, the retirement plan becomes a shareholder, and the entrepreneur is free to work in the business.
ROBS exists because Congress created an exception that allows qualified plans to purchase employer securities. This rule was originally designed to support employee ownership plans, but the same legal exception makes ROBS possible for entrepreneurs who want to use their own retirement money to fund their own business.
Why ROBS Is Legal Under Federal Tax Law
ROBS is grounded in the Internal Revenue Code. Section 4975 generally prohibits certain forms of self-dealing between retirement plans and plan participants. However, Congress created a list of explicit exemptions for transactions that are permitted. One of these exemptions allows qualified retirement plans to purchase stock issued by the employer sponsoring the plan.
This exemption enables structures like employee stock ownership plans. ROBS applies the same legal principle to entrepreneur-led companies. As long as the valuation of stock is accurate, the plan follows administrative rules, reporting is timely, and the structure is properly maintained, the transaction is entirely permissible.
The key is compliance. ROBS must be executed by professionals who understand the rules, maintain the plan annually, and ensure the structure continues to operate within statutory guidelines.
How ROBS Works Step by Step
- A new C Corporation is created.
- The corporation adopts a qualified 401(k) plan.
- Funds from an existing retirement account are rolled into the new plan.
- The plan purchases stock in the corporation at fair market value.
- The corporation uses that capital to buy or operate a business.
The entrepreneur becomes an employee of the corporation and can take a salary. The retirement plan becomes a shareholder. The business receives working capital without incurring debt, giving owners a stronger starting position.
Profits can be reinvested in the business or distributed to the plan as dividends. When the business is eventually sold, the proceeds attributable to the plan’s ownership stake return to the retirement account. If the plan includes Roth components, those gains may later be tax free.
The Strategic Advantages of ROBS
- Full capital access without penalties
Retirement funds become business investment capital without taxes or early withdrawal penalties. - No debt burden
ROBS introduces equity, not loans. There is no repayment schedule and no interest. - No personal guarantees
Banks often require personal guarantees, sometimes backed by home equity. ROBS avoids this entirely. - Ability to work in the business
Traditional retirement accounts restrict involvement. ROBS removes that barrier. - Tax advantaged growth
If the business pays dividends into the plan, those funds grow inside the plan on a tax-deferred or tax-free basis. - Support for larger opportunities
Because ROBS increases available capital, entrepreneurs can pursue acquisitions that otherwise might have been out of reach.
Why SBA Loans and ROBS Work So Well Together
ROBS and SBA loans function differently, which is exactly why they complement each other so effectively. SBA loans provide leverage by financing the majority of a purchase price. ROBS provides the equity investment needed to satisfy lender requirements. Most SBA lenders need buyers to contribute between 10 percent and 30 percent of the purchase price. For many deals, this represents the largest single hurdle.
With ROBS, retirement funds are invested into the new corporation and can be used to meet the equity requirement. The SBA loan then covers the rest. For example, if the buyer is acquiring a $1 million business and the lender requires a 20 percent equity injection, ROBS can supply the $200,000 investment while the SBA loan covers the remaining $800,000. This structure preserves personal savings, reduces personal risk, and often improves approval odds because lenders prefer deals with stronger capitalization.
Combining the two also opens the door to larger acquisitions where the buyer needs both equity and leverage. Instead of treating ROBS and SBA financing as conflicting solutions, modern business buyers treat them as partner tools that create a healthier balance sheet and a more lender-friendly transaction.
Additional Ways Entrepreneurs Use ROBS
ROBS is flexible and adapts to different deal structures. Some buyers combine ROBS with seller financing. Others bring in private investors for a minority stake. Some use ROBS exclusively to avoid debt altogether, especially when acquiring a low-cost service business. ROBS supports these variations because it adds equity without imposing restrictions on the overall deal structure, aside from compliance with retirement plan rules.
Why Provider Choice Matters
Executing a ROBS structure requires precision. The IRS expects proper valuation, accurate documentation, appropriate administration, and annual reporting. Improper execution can expose entrepreneurs to unnecessary risk, particularly in the event of an audit.
IRA Financial is widely recognized as an industry leader in the design, administration, and long-term maintenance of ROBS structures. Founded by tax attorney Adam Bergman, the firm has more than sixteen years of experience, has built high-integrity compliance systems, and oversees thousands of active plans across nearly every industry. Support extends beyond initial setup and includes plan administration, regulatory reporting, valuation reviews, transaction guidance, and ongoing audit protection.
For entrepreneurs pairing ROBS with SBA financing, IRA Financial also provides specialized guidance to ensure the structure remains compliant with lending requirements and SBA program rules.
Final Thoughts: ROBS and SBA Loans Are Partners, Not Competitors
ROBS is not a shortcut or a loophole. It is a legal mechanism built directly into federal tax law and used by thousands of entrepreneurs each year. Entrepreneurs who combine ROBS with SBA loans are not taking unusual risks. They are simply using the tools that have been designed to help people acquire businesses in a strategic and financially responsible way.
SBA loans deliver accessible leverage. ROBS provides tax-efficient equity. Together, they reduce personal financial strain, strengthen loan applications, and create a more stable foundation for long-term success. In today’s environment, the most successful business buyers are not choosing between ROBS and SBA loans. They are combining both to build businesses with less debt, healthier cash flow, and far greater control over their own financial futures.
