The Down Payment Problem — and a Creative Solution
One of the biggest hurdles aspiring business owners face isn’t getting approved for an SBA loan — it’s coming up with the equity injection (down payment). Most SBA loans require 10–20% of the total project cost upfront, which can mean $50,000, $100,000, or even more depending on the deal size.
For many entrepreneurs, that kind of cash isn’t sitting in a savings account. But it might be sitting in a retirement account. If you have a 401(k), IRA, or other qualified retirement plan, a strategy called ROBS — Rollovers for Business Startups — allows you to use those retirement funds to invest in your new business without paying early withdrawal penalties or taxes.
At GoSBA, we’ve helped facilitate over $320 million in SBA loan funding in 2025, and ROBS is one of the equity injection strategies we see regularly. This guide dives deep into how ROBS works, when it makes sense, and what risks you need to understand before going this route.
For a foundational overview, also check out our ROBS Guide: Using Retirement Funds for Your SBA Loan Down Payment.
How ROBS Works: A Step-by-Step Breakdown
ROBS isn’t a loan from your retirement account — it’s a restructuring that allows your retirement funds to become an investment in your business. Here’s exactly how the process works:
Step 1: Form a New C-Corporation
You create a new C-Corporation (C-Corp). This is a critical requirement — ROBS only works with C-Corps, not LLCs, S-Corps, or sole proprietorships. The C-Corp will be the entity that operates your business.
Step 2: Establish a Qualified Retirement Plan Under the C-Corp
The new C-Corp sponsors a qualified retirement plan — typically a 401(k) plan. This is the plan that will receive your existing retirement funds.
Step 3: Roll Over Your Existing Retirement Funds
You roll over funds from your existing 401(k), IRA, 403(b), or other qualified retirement plan into the new C-Corp’s 401(k) plan. This is a trustee-to-trustee transfer, meaning the money moves directly between retirement accounts. Because it’s a rollover (not a withdrawal), there are:
- No early withdrawal penalties (even if you’re under 59½)
- No income taxes on the transferred funds
- No loan to repay
Step 4: The Retirement Plan Purchases C-Corp Stock
The C-Corp’s retirement plan uses the rolled-over funds to purchase stock (shares) in the C-Corp at fair market value. This is the key transaction: your retirement plan becomes an investor in your business.
Step 5: The C-Corp Uses the Capital
The C-Corp now has cash from the stock purchase, which it can use for any legitimate business purpose — including serving as the equity injection for an SBA loan. The funds can also be used for equipment, inventory, working capital, franchise fees, or any other startup or acquisition costs.
Step 6: Ongoing Compliance
The C-Corp must maintain the retirement plan, file required IRS forms (Form 5500), and ensure ongoing compliance with ERISA (Employee Retirement Income Security Act) and IRS regulations. This is not a “set it and forget it” strategy — ongoing administration is required.
The Pros of Using ROBS for Your SBA Loan Down Payment
ROBS can be an attractive option for the right borrower. Here are the key advantages:
No Debt on the Equity Injection
Unlike borrowing against your home or taking a personal loan for the down payment (which SBA lenders generally don’t allow anyway), ROBS creates equity — not debt. The money invested in your business through ROBS is true equity, which is exactly what SBA lenders want to see.
No Tax Penalties
Because ROBS is a rollover (not a distribution), you avoid the 10% early withdrawal penalty and income taxes that would apply if you simply cashed out your retirement account. On a $100,000 rollover, this can save you $30,000–$40,000 in taxes and penalties.
Access to Significant Capital
If you’ve been saving in a 401(k) for 10–20 years, you may have $100,000, $250,000, or more available. ROBS allows you to deploy this capital into a business you control, rather than leaving it in market investments you can’t influence.
SBA Lenders Accept ROBS
SBA lenders are very familiar with ROBS as an equity injection source. It’s a well-established and accepted practice in SBA lending, so you won’t face resistance from lenders when presenting ROBS as your down payment source.
You Control the Investment
Instead of your retirement funds being invested in stocks and bonds that you have no control over, ROBS puts your money into a business you operate. If the business succeeds, the value of the C-Corp stock (held by your retirement plan) grows — potentially offering returns that exceed market averages.
The Cons and Risks of ROBS
ROBS is not without significant risks and drawbacks. You need to understand these clearly before proceeding:
Your Retirement Is at Risk
This is the biggest consideration. If your business fails, you could lose some or all of the retirement funds you invested. Unlike a diversified portfolio of stocks and bonds, your retirement savings are concentrated in a single business — yours. There’s no FDIC insurance or market diversification to protect you.
IRS Scrutiny
The IRS has identified ROBS transactions as an area of compliance concern. While ROBS is legal when done correctly, the IRS has found compliance issues in a significant percentage of ROBS arrangements it has audited. Common issues include:
- Improper stock valuations: The C-Corp stock must be purchased at fair market value — undervaluing or overvaluing the stock can trigger prohibited transaction penalties
- Plan administration failures: Failing to file Form 5500, not offering the plan to eligible employees, or other ERISA violations
- Prohibited transactions: Using the retirement plan in ways that benefit the business owner personally rather than the plan participants
- Failure to maintain the C-Corp structure: Converting to an S-Corp or LLC after the ROBS transaction can create compliance problems
C-Corp Tax Implications
C-Corporations are subject to double taxation — the corporation pays corporate income tax on profits, and shareholders pay personal income tax on dividends. While there are strategies to minimize this (such as paying yourself a reasonable salary, which is deductible to the corporation), the C-Corp structure is generally less tax-efficient than an S-Corp or LLC for small businesses.
Ongoing Costs
Maintaining a ROBS arrangement involves ongoing costs:
- ROBS provider fees: $100–$175+ per month for plan administration
- Annual valuation: The C-Corp stock must be valued annually for Form 5500 reporting
- Tax preparation: C-Corp tax returns are more complex (and expensive to prepare) than S-Corp or LLC returns
- Legal and compliance costs: Ongoing ERISA compliance requires professional support
Complexity
ROBS is significantly more complex than simply writing a check for your down payment. The setup process takes 3–4 weeks, requires specialized ROBS providers, and creates ongoing administrative obligations. You need to work with professionals who specialize in ROBS — this is not a DIY project.
IRS Compliance: What You Must Get Right
Given the IRS’s focus on ROBS compliance, getting the details right is critical. Here are the key compliance requirements:
- Use a reputable ROBS provider: Companies that specialize in ROBS (like Guidant Financial, Benetrends, or similar firms) handle the legal setup, plan administration, and compliance. This is not an area to cut corners.
- Fair market valuation: Have an independent valuation done when the retirement plan purchases C-Corp stock, and annually thereafter.
- File Form 5500 annually: This is the retirement plan’s annual information return filed with the IRS/DOL. Failing to file triggers automatic penalties.
- Offer the plan to eligible employees: Once you hire employees, you generally must offer them the ability to participate in the retirement plan. Excluding eligible employees is a compliance violation.
- Maintain the C-Corp structure: Don’t convert to an S-Corp or LLC while the ROBS arrangement is active without proper guidance.
- Avoid prohibited transactions: Don’t borrow from the retirement plan, don’t use plan assets for personal benefit, and don’t engage in self-dealing transactions.
When ROBS Makes Sense
ROBS is the right choice in certain situations:
- You have substantial retirement savings ($50,000+) and limited liquid savings for a down payment
- You’re confident in your business opportunity — the business has strong fundamentals, a proven model (like a franchise), or you have deep industry experience
- You understand and accept the risk of concentrating your retirement savings in a single business
- You’re committed to compliance and willing to pay for professional ROBS administration
- You need a larger equity injection than you can assemble from other sources
When ROBS Doesn’t Make Sense
ROBS isn’t the right fit for everyone:
- Your retirement savings are your only financial safety net: If losing these funds would leave you with no retirement resources, the risk may be too high
- You’re close to retirement age: If you’re within 5–10 years of retirement, the time to recover from a potential loss is limited
- Your business opportunity is speculative: ROBS works best for proven business models, not untested concepts
- You have other sources of equity: If you can fund the down payment from savings, home equity, or family gifts, those options are simpler and less risky
Alternatives to ROBS for Your SBA Loan Down Payment
Before committing to ROBS, consider these alternative equity injection sources:
Personal Savings
The simplest option. If you have sufficient savings, using cash avoids the complexity and risk of ROBS entirely.
Home Equity
A home equity line of credit (HELOC) can sometimes be used for equity injection, though some SBA lenders have restrictions. The advantage is you retain your retirement savings; the risk is your home becomes additional collateral.
Gift Funds
The SBA allows gifts from family members to serve as equity injection, provided they come with a gift letter stating no repayment is expected. This is a common option for borrowers with supportive family networks.
Investor Equity
Bringing in an equity partner or investor can provide the down payment while sharing both the risk and reward. The downside is diluted ownership and potentially giving up some control.
Seller Financing (Standby)
In business acquisitions, the seller may agree to carry a note on standby (no payments during the SBA loan term) as part of the equity injection. This is an advanced strategy that requires careful structuring but can be very effective.
401(k) Loan (Not ROBS)
If your current employer’s 401(k) plan allows it, you may be able to borrow up to $50,000 from your 401(k) as a participant loan. This is different from ROBS — it’s a loan you repay with interest. The limitation is the $50,000 cap, which may not be sufficient for larger deals. Also note: some SBA lenders may not accept 401(k) loans as equity injection since they represent debt.
How ROBS Works With SBA Loans: A Practical Example
Let’s walk through a typical scenario:
Sarah wants to buy a franchise for $400,000.
- Total project cost (including working capital): $450,000
- SBA 7(a) loan: $360,000 (80%)
- Equity injection needed: $90,000 (20%)
- Sarah’s 401(k) balance: $150,000
- Sarah’s liquid savings: $20,000
Sarah’s approach:
- She engages a ROBS provider to set up a C-Corp and roll over $90,000 from her 401(k) into the new C-Corp’s retirement plan
- The retirement plan purchases $90,000 in C-Corp stock
- The C-Corp now has $90,000 in cash to use as the SBA loan equity injection
- She applies for a $360,000 SBA 7(a) loan through GoSBA
- GoSBA matches her with a lender experienced in franchise financing who accepts ROBS equity
- The loan closes, and Sarah uses the combined $450,000 to acquire the franchise
- She keeps $60,000 in her 401(k) for continued retirement savings and retains her $20,000 in personal savings as a safety net
GoSBA’s Role in ROBS-Funded SBA Loans
GoSBA works regularly with borrowers who use ROBS for their equity injection. Here’s how we help:
- Lender matching: Not all lenders handle ROBS-funded deals the same way. Our 50+ lender network includes lenders who are very comfortable with ROBS equity and won’t slow down your deal with unnecessary questions.
- ROBS provider coordination: We help ensure the ROBS setup and the SBA loan application timelines are aligned so there are no delays at closing.
- Free business plan and projections: Our complimentary business plan package (worth $2,500–$5,000) strengthens your application regardless of your equity source.
- Free service: As always, GoSBA’s brokerage services are 100% free to borrowers.
Making the Right Decision for Your Situation
ROBS is a powerful tool, but it’s not the right tool for every situation. The decision comes down to:
- How much retirement capital you have vs. how much you need for the down payment
- Your confidence in the business opportunity
- Your risk tolerance and proximity to retirement
- Whether simpler alternatives (savings, gifts, seller financing) are available
- Your willingness to manage the ongoing compliance requirements of a C-Corp and ROBS arrangement
The best approach is to discuss your specific situation with professionals who understand both ROBS and SBA lending. GoSBA can help you evaluate whether ROBS is the right strategy for your deal and connect you with reputable ROBS providers if you decide to move forward.
Take the Next Step
Whether you’re considering ROBS, have questions about alternative equity sources, or are ready to start your SBA loan application, GoSBA is here to help — at no cost to you.
Contact GoSBA today for a free consultation. We’ll help you evaluate your equity injection options, match you with the right lender from our 50+ network, and provide a free professional business plan to strengthen your application.
Learn more about ROBS fundamentals in our ROBS Guide: Using Retirement Funds for Your SBA Loan Down Payment.
