IBC Case Study 2 - The Entrepreneur

The greatest threat to any business owner is cash flow. It is the lifeblood of a business. Any business will live, breath and die by its ability to generate a predictable flow of money. If you get the formula right, you get to bring your great idea to add value to the world to light. Get it wrong, and you fail.

Most entrepreneurs however are married to lending institutions because any business needs capital to run. There are start up costs, overhead, payroll. The list goes on and on. Unfortunately, this means that almost all businesses enter into a toxic relationship with a lending institution where they are forced to give and give and give, while their partner, the bank, takes and takes and takes. There is another way.

Let’s look at our entrepreneur Galen. He’s 31 and has a vision to bring value to everyday Canadians through his product, all natural, gourmet dog treats. Galen runs a small business with 3 employees, himself and 2 others. The company’s revenue is $300,000 per year. Galen has dreams of scaling his business to all of Canada and then eventually into the US. To do this, he knows he will need significant capital in the future to buy a bigger manufacturing facility and increase his marketing and sales. Before Galen can begin to scale however, he needs to get a grip on his current finances.

Galen’s business has been incorporated. He takes a salary from the business just like the other two staff. He has decided to take out a corporate owned, corporate funded policy on his own life for the purposes of setting up a personal banking system. With a corporate owned policy, the money used to pay the premium comes from after tax dollars.

Below is Galen’s budget:

His net profit is $50,000. He has been saving this money in his business account to use at a later date when he scales. His thought is, he is going to save up this money each year so he can limit the amount he needs to borrow when he decides to scale. It also serves as an emergency fund should he ever need it to cover his expenses in the event he has a down year.

It is good that Galen recognizes the need to have ready access capital to ensure the longevity of his business, but he is missing out on the growth of that money by keeping it sitting in an account. There is a cost to capital. Meaning he is trading the future growth of that money for security and access to it now.

By putting his profits through a policy designed to act as his personal banking system, Galen gets the growth of his money, and also the ready access to his capital. He also simultaneously gets protection for his company. If he were to pass away, the death benefit is paid to the company which can then use the money to continue operating.

With his profits now going towards funding his future vision, Galen has options. He isn’t tied to market conditions and trying to time the interest rates. When an opportunity arises to expand, he can take it without worrying if he can handle the cost. He will be able to see the projections from his policy. He is planning off certainty rather than uncertainty. Galen can scale on his terms, when the opportunity arises because he controls the banking function for his business. He has the flexibility and peace of mind of knowing what his financial future holds.

Let’s be perfectly clear, Galen hasn’t changed his habits or added an additional expense for his company. Instead, he has changed where his profits reside. In doing so he gets additional insurance for his business, and he benefits from creating a liquid pool of capital that is contractually guaranteed to grow.

Based off the whole life insurance illustration, Galen can now start planning. If he projects he will need $250,000 for improvements to his manufacturing facility, he can see, with certainty, that he will have the capital available after 5 years.

Understanding the benefits of shopping at home for capital and not entering another toxic relationship with a bank, where they have all the control, Galen decides to wait to scale.

5 years later, Galen takes a policy loan to finance the upgrades to his manufacturing facility. There are no applications, no hoops to jump through, no justifying the loan. All he has to do is request the money from the life carrier.

Galen’s plan is to take a portion of the additional revenue generated from the new manufacturing facility and use that to repay the policy loan, while continuing to put $50,000 a year as premium into the policy.

I want to take a minute to look at what happens in the policy between years 5 and 6. The amount Galen puts into the policy as premium, $50,000 hasn’t changed. The cash value, however, has increased by almost $64,000. That is a net gain of almost $14,000. What is happening is that the policy is getting more efficient over time.

As the death benefit increases due to the excelerator deposit option and the dividends buying paid-up additions, the cash value growth must accelerate to keep up. Galen is seeing the benefits of owning the banking system as it relates to his needs.

Galen has effectively created a system where his profits are increasing every single year, while he does nothing different. All he has done is put his money in a place where it works for him, not the bank.