If your household has income outside the business to make the payment, either can fund an SBA down payment; if it does not, ROBS or cash is usually what counts. A ROBS (rollover as business startup) puts retirement savings into your new company as equity, with no payment, and SBA lenders treat it like cash. A home equity loan or HELOC is borrowed: it counts only when it will be repaid from sources other than the business being bought, and its payment enters your personal cash flow. ROBS costs a C corporation, a plan to run and savings at risk. Home equity costs interest and puts your house at risk.
- ROBS
- Retirement savings buy stock in your new C corporation; equity, no payments
- Home equity loan or HELOC
- A loan against your house; borrowed money you repay monthly
- SBA treatment of ROBS
- Counts toward the equity injection like cash
- SBA treatment of home equity
- Counts only if repaid from sources other than the business
- What you put at risk
- ROBS: retirement savings. Home equity: your house
- Guarantee
- Either way, every owner of 20% or more personally guarantees an SBA loan
Why the source of the down payment matters
For a start-up or a complete change of ownership, SBA requires an equity injection of at least 10% of total project costs: the purchase price plus working capital, closing costs and financed fees. Conventional lenders have no regulatory minimum and set their own, often higher. The rules on what counts are in how much equity you need to buy a business.
The lender does not only ask how much you are putting in. It asks where the money came from, and it traces it. The distinction that matters is between money that is yours to put at risk (savings, a gift, investor equity, a ROBS) and money you borrowed. Borrowed money is still owed after closing, and someone has to pay it. If the only source of that payment is the business being bought, the business is carrying more debt than the loan request shows, and the injection is not really equity.
Borrowed injection can count when it will be repaid from sources other than the business being bought, and the lender will include its payment in your personal cash flow.
Side by side
| ROBS | Home equity loan or HELOC | |
|---|---|---|
| What it is | A 401(k) plan sponsored by your new C corporation buys the company's stock with rolled-over retirement money | A loan secured by your home, either a lump sum with fixed payments or a revolving line |
| SBA treatment | Equity injection, like cash | Borrowed injection: counts only with a repayment source outside the business |
| Monthly payment | None | Yes, and it goes into your personal and global cash flow |
| Direct cost | Set-up and yearly plan administration | Interest, plus closing costs on the loan |
| Tax | No tax on the rollover if done correctly; C corporation profits taxed twice if paid out as dividends | Whether the interest is deductible depends on how the proceeds are traced and used; ask a tax adviser |
| Compliance | Ongoing: the plan must be run as a real retirement plan every year | Little beyond the home loan itself |
| Company structure | Must be a C corporation while the plan holds stock | Any structure |
| What you put at risk | Retirement savings, behind every lender | Your house, to the home equity lender |
| Your liquidity after closing | Retirement assets become private company stock | Home equity is used up; you owe a new payment |
How SBA lenders treat each
ROBS money is equity. Once the plan has bought stock and the cash sits in the company's account, it is paid-in capital with no obligation to repay. SBA lenders count it toward the 10% minimum the same way they count savings. What they check is the paper trail: the corporate documents, the plan documents, the rollover confirmations, and bank statements showing the money arriving before closing. The full mechanics are in using a 401(k) rollover to fund the down payment.
Home equity money is borrowed. The lender asks how the home equity payment will be made. If the household has income that does not depend on the business, such as a spouse's salary, rental income or investment income, and that income covers the household's costs plus the new payment, the loan can count as injection. If the only way to make the payment is the salary the buyer will draw from the business, the lender is in effect financing the down payment out of the same cash flow it is lending against, and the injection is unlikely to be accepted.
Even when home equity counts, it does not disappear from the analysis. SBA requires debt service coverage of at least 1.15x at the business and 1.0x globally, including the owners. The global cash flow analysis adds up the business's cash flow and the owners' personal income and obligations, and the home equity payment is one of those obligations. How the buyer's own pay is treated is in the buyer's salary in acquisition DSCR.
A worked example: two buyers, same deal
Two buyers each want to buy a business with total project costs of 2,000, so each needs at least 200 of injection. Each plans to borrow the 200 against their home, with payments of about 26 a year. The figures are plain numbers for illustration.
| Buyer 1 | Buyer 2 | |
|---|---|---|
| Household income outside the business | Spouse's salary of 200 | None; the buyer leaves a salaried job to run the business |
| Household living costs | 150 | 150 |
| Home equity payment | 26 | 26 |
| Outside income left after costs and payment | 24 | Short by 176 |
| Salary from the business | 160 | 160 |
| Left over, business salary included | 184 | Short by 16 |
| Is the payment covered from outside the business? | Yes: the spouse's salary covers costs and the payment | No: every dollar comes from the business |
| Likely lender view | Home equity counts as injection | Home equity unlikely to count; injection must come from elsewhere |
Buyer 2 has the same deal, the same credit and the same amount of cash in hand at closing, and a weaker file. The fix is not a better rate on the home equity loan. It is a different source: a ROBS, savings, a gift with proper documentation, an investor, or a seller note on full standby, which can supply up to half of the required injection. The payment also leaves Buyer 2's household short even on the business salary, which the global cash flow analysis would catch whatever the injection question decided.
For a buyer with no income outside the business, home equity is often not a down payment at all. ROBS or cash may be the only sources that count.
What each puts at risk
Every owner of 20% or more personally guarantees an SBA loan, whichever source funds the down payment. A retirement plan cannot guarantee a loan, so with a ROBS the lender looks through the plan to the buyer. The guarantee is the same in both columns; what differs is what else is exposed if the business fails.
| If the business fails | ROBS | Home equity |
|---|---|---|
| The down payment | Lost: the plan's shares sit behind every lender and are likely worth nothing | Lost, but the home equity loan is still owed |
| Your house | At risk only through the guarantee, and any lien the SBA lender took | At risk to the home equity lender as well as through the guarantee |
| Retirement savings | The rolled-over portion is gone | Untouched |
| Monthly obligations after failure | The guarantee | The guarantee plus the home equity payment |
There is a second layer on the house. When business assets do not fully secure an SBA loan, SBA lenders commonly take a lien on the owner's home if it has meaningful equity. A buyer who has already borrowed against the house for the down payment may find the SBA lender taking a lien behind the home equity lender as well, so the house supports both the down payment and the loan. See whether an SBA loan takes your house as collateral and the personal guarantee on an acquisition loan.
ROBS concentrates the risk differently. The house is less exposed, but retirement savings that would otherwise be protected sit at the very bottom of the capital structure, and a plan that fails its ongoing compliance can be disqualified, which can turn the rollover into a taxable distribution after the fact.
Cost, timing and the practical traps
- ROBS has to be finished before closing. The corporation, the plan, the rollover and the stock purchase must be complete and the cash in the company's account before the lender funds. Set it up before paying any deposit under the letter of intent.
- Draw the HELOC before closing and hold the cash. A home equity line can be frozen or reduced by the home lender; many are not committed in the sense a business lender would use the word. Money that is still undrawn at closing is not money you have. See committed vs uncommitted lines.
- Variable rates move the payment. A HELOC usually floats, and some lenders test the global cash flow at an amortizing payment rather than the interest-only payment during the draw period. See fixed vs variable rates.
- ROBS changes the company's tax life. A C corporation pays tax on profits, and dividends are taxed again. Most owners pay themselves through salary, but pass-through treatment is off the table while the plan holds stock.
Choosing, or combining
Many buyers use both, plus cash and a standby seller note. A sensible order of questions:
- Does the household have income outside the business that covers its costs plus a home equity payment? If not, rely on ROBS, cash, gifts or investors for the injection.
- How much of total retirement savings would the ROBS use? Rolling a portion and keeping the rest outside the deal limits the concentration.
- Would the C corporation and its compliance suit the business for as long as the plan holds stock?
- Will the SBA lender also take a lien on the house? If so, borrowing against it for the down payment stacks two claims on the same asset.
- Can the seller carry a note on full standby for the life of the SBA loan? That can cover up to half of the injection without a monthly payment. See seller notes and SBA's full-standby rule.
Whatever the mix, the lender will want the SBA file: business tax returns for two to three years, the P&L and balance sheet, the target's latest full year of figures, the letter of intent, and personal tax returns and a personal financial statement for each owner of 20% or more. For ROBS, add the plan and rollover documents; for home equity, the loan agreement, the statement showing the draw, and evidence of the outside income that repays it. Transparent's package lays out the injection in the sources and uses with the trail behind each dollar, so the lender sees on first read which money is equity and which is borrowed. Of Transparent's 1,800+ lenders, 278 write SBA 7(a) and 504, and on SBA loans the lender pays Transparent, not the borrower.
Common questions
- Will an SBA lender accept a HELOC as my down payment?
- It can, if you show that the HELOC will be repaid from income outside the business you are buying, such as a spouse's salary or rental income. The payment is counted in your personal and global cash flow. If your only income will be your salary from the business, the lender is unlikely to count it.
- Does SBA allow ROBS for the equity injection?
- Yes. SBA lenders treat ROBS money as equity once the plan has bought the company's stock and the cash is in the company's account. They check the plan and rollover documents and trace the funds. The buyer still personally guarantees the loan.
- Which is cheaper, ROBS or home equity?
- ROBS has no interest, but it has set-up and yearly administration costs, the tax cost of running as a C corporation, and the lost growth on the retirement money if the business struggles. Home equity costs interest and closing costs. The better comparison is what each risks and whether each counts with the lender.
- Can I use both ROBS and home equity?
- Yes. Many buyers combine a partial rollover, some home equity, cash and a standby seller note. Each piece is documented separately, and only the home equity portion needs a repayment source outside the business.
- If I use home equity for the down payment, can the SBA lender still take a lien on my house?
- It can. When business assets do not fully secure an SBA loan, lenders commonly take a lien on the owner's home if it has meaningful equity, in a position behind the existing mortgage and home equity loan.