Starting or growing a business often means exploring ways to fund your vision. Among the many options, revenue-based financing and ROBS (Rollover for Business Startups) plans offer unique paths to get the resources you need. Each has its strengths and challenges—let’s compare the two to gain greater understanding of each option.
What Is Revenue-Based Financing?
Revenue-based financing is a loan repaid as a fixed percentage of your business’s monthly revenue. The repayment continues until a predetermined multiple of the original loan is paid back. This method works well for businesses with steady cash flow but fluctuating monthly earnings.
This flexibility gives borrowers breathing room during slower months. For example, if revenue dips one quarter, the repayment amount adjusts automatically. However, the cost of this funding type may be higher than traditional loans, so weigh those options carefully.
Exploring ROBS Plans
ROBS plans allow individuals to use the retirement savings in their 401(k) to fund their business without tax penalties. Unlike revenue-based financing, this option involves no debt or monthly repayments. Instead, it provides up-front capital by rolling over existing retirement funds into the business.
This approach works well for business owners confident about long-term success. It allows you to invest directly in a company you fully control. That said, it comes with risks. Tying retirement savings to your business means placing your future security on the line.
Key Differences Between the Two
Revenue-based financing and ROBS plans provide funding in completely different ways and are suitable for different needs. Revenue-based financing doesn’t involve giving up ownership in your business. The fixed repayment percentage aligns well with businesses that have variable monthly revenue but consistent growth potential.
On the other hand, ROBS plans require you to invest your own money, typically through a retirement fund. This means there’s no debt, which might appeal to some entrepreneurs. However, the risk centers on your retirement savings. If your business doesn’t succeed, it’s not just the company that takes a hit but your future financial stability as well.
Which Option Is Right for You?
The right solution depends on your business model, cash flow, and risk tolerance. For entrepreneurs with a proven track record and steady revenue, revenue-based financing offers flexibility and fewer strings attached. Those planning to launch a business and seeking debt-free support might look toward ROBS plans instead.
As you decide, remember to consider the big picture, including your financial goals and how each choice might affect your stability down the road. Speaking with a financial advisor who understands small business funding solutions can help you clarify the best path for your situation.
Modern entrepreneurs have more funding options than ever, but with choice comes careful comparison and contrast. Exploring both revenue-based financing and ROBS plans gives you opportunities to move forward in ways that fit your unique goals. Stepping into the right one is about balancing your present business needs with your long-term future.
Curious about how to get your startup running, perhaps with an injection of capital? Pango Financial’s funding solutions tool will walk you through your options and help you choose the perfect fit.