Does Your Credit Affect Rollover Business Financing?

Rollover business financing is a method of small business funding that uses your 401(k) to provide startup capital for your new business. It’s a popular alternative to traditional loans because it isn’t a loan at all—a ROBS, or Rollover for Business Startups, uses money that’s already yours.

Does your credit history affect rollover financing for your business? Learn more about what makes a ROBS plan unique and why it could be the right choice for you.

Who Qualifies for a ROBS Plan?

Rollover financing plans are ideal for entrepreneurs with more than $25,000 vested in their 401(k)s. Those funds can be used for new or existing businesses, or to buy into a franchise.

Because a ROBS is not a loan, you don’t need to pass a credit check or secure lender approval to start the rollover process. This makes ROBS financing an attractive option for individuals who don’t want to go into debt, or who have a checkered credit history.

What Affects the Rollover Process?

Funding your business through a 401(k) rollover for business startups plan requires you to set up your business as a C corporation. It’s a fairly common structure for larger businesses—less so for smaller ventures—and requires you to pay taxes on both profits and dividends.

Businesses that receive funding through ROBS plans are under greater scrutiny by the IRS, so you’d do well to have a financial advisor on your side come tax season. Rollover financing is a great way to fund a business without taking on debt, but you must abide by all applicable tax laws and filing requirements.

Does Credit History Matter?

As we briefly mentioned before, a ROBS plan is not a loan. It’s a method of moving money that is already yours from one 401(k) account into your new business 401(k) account, allowing you to avoid early withdrawal fees and tax penalties.

Because you are not borrowing money from a lender, your credit score is not relevant to the ROBS process. If your credit history has its share of ups and downs, you can still secure rollover financing as long as you have sufficient funds in your 401(k) retirement account.

So, does your credit score affect ROBS financing? Because you’re not borrowing money to pay back later, your credit history isn’t considered when applying for rollover financing. If your credit history is less than spotless but you have a significant nest egg, you could tap into it for debt-free business funding.

Wondering about the other financing options available to you as an entrepreneur? Use Pango Financial’s funding solutions tool to learn about more innovative ways to secure capital for your business.