Financial Freedom for Business Owners

Olivia: Hello and welcome to The Control Your Cash Podcast. Hi, I’m Olivia Kirk. 

Tim: I’m Tim Yurek.

Olivia: And today we’re going to talk about the importance of controlling your cash as a business owner. When it comes to having a family owned business, cash is king. Not necessarily physical cash, but cash accessibility. 

Because let’s face it, whoever controls your cashflow controls your life and more importantly controls your business. I mean most business owners get into their own business to control their destiny. They’re sick of working for the man and they’d rather call the shots and hold their destiny in their own hands. 

Tim: So the key here is having access to cash. And one of the things that I really enjoy about working with business owners is the fact that we can show them how to get one dollar to do multiple jobs. And by that, I mean, you know, maybe they’re setting up plans to fund their succession plan, or they’re setting up plans to attract, retain, and reward some key employees, or they’re trying to set up an exit strategy.

But along the way, if they’re doing this properly, They’re allowed or they’re able to build cash and by having that access to the cash, they can use it to help grow their business. So they’re getting one dollar to do a succession plan or key person retention, but that same dollar is building up cash that they could access and leverage to grow their business.

One dollar, two jobs. And I got to tell you. That works out so swimmingly well for all the business owners that we’ve dealt with. 

Olivia: Exactly. We recently worked with a business owner. We started policies for key employee purposes. Meaning they cross purchased. One owner bought a policy on the other and vice versa to fund a buyout in the event of one of their deaths so they wanted to have that funding available at the death of whichever partner comes first. And they had no plans on accessing that cash whatsoever throughout the life of the policy. But life happens, things change. The economic environment that was there when they started these policies, let’s say five, five years ago, about six years ago.

Yeah. That it was very different back then versus today where inflation is up. Interest rates are up and cashflow in a lot of situations is coming back down because of the squeeze on the consumer. 

Tim: Yeah. And the irony is when we, as Olivia noted, when we, we originally put the plan into effect, we mentioned to them, Hey, you could also borrow against this cash.

And they said, Oh no, we would never do that. So, okay, well, just keep that in mind because it’s certainly an option for you. Well, now fast forward to August of this year. A couple months ago, and we get a call and, Hey, how much cash is in those policies? And we told them and they said, uh, We need a loan. I said, Oh, okay.

What, what changed? You said you weren’t going to borrow. He goes, well, we bought a truck in July. We did it like we always did. We borrowed against our, on our credit line. And we got our first interest statement and it was 9.5%. How much does it cost to borrow against those life insurance policies?

Well, it was 5.35%. He said, well, we’ll take that loan. But here’s the point because they built up this pile of money Now they have the option to use it. And that’s where the freedom comes in. So in their mind They’re looking at it like okay 5 and 5.35 is lower than 9.5 and I get that part of it, but…

Olivia: That’s just the beginning.

Tim: That’s just the beginning. So he calls me and says, Hey, how do I start paying this loan back? I said, well…

Olivia: Do you want to? 

Tim: When, when do you want to? He goes, What do you mean, when do I want to? I said, Whenever you want to start. This is an unstructured loan. So that means, you decide when, and actually if, you pay the loan back and then you also decide how much and oh, by the way, if you commit to a certain monthly figure and you find out that cashflow is not as good as in the previous months as it is now, you can stop it or reduce it.

And that’s when it’s the light bulb went on for him and he’s like, Whoa, we are in control here, aren’t we? And that’s the point. You know, financing in and of itself isn’t bad as long as you’re in control of the process. And that’s the thing that I think the value that we can bring by utilizing plans that are set up for different purposes.

But now we can leverage the cash, and that provides the freedom.

Olivia: Yeah, exactly. And think about it. By borrowing against the life insurance policy, through these policy loans that are contractually guaranteed in these contracts, it doesn’t impact the net worth of the business. Meaning, whether they pay cash, financed traditionally or financed through a policy loan, the piles of cash are still the same.

They still have the asset worth X amount of dollars and they still have a decrease in cash, a loan from a bank, or a lien against that life insurance policy loan. And let’s just take a step back here and talk about the benefits of borrowing against a life insurance policy. First of all, it’s contractually guaranteed as long as they have cash in that policy, they’re able to access it on a guaranteed basis.

Because the way life insurance policy loans work is unique. In that the life insurance company is actually giving the policy owner a loan from the general account of the life insurance company, not the life insurance policy. The life insurance company then places a lien against the policy owner’s cash value.

Meaning after you borrow, let’s say $150,000, you don’t have access to that $150,000 until it’s repaid. And they charge you interest. So when you’re paying back that loan interest, it’s going towards the insurance company’s profits for the year. But when you use a mutually owned life insurance company, the owners of the company who are going to benefit from the profits that the insurance company makes are actually the policy owners.

So when the life insurance company is making that profit, it goes to the dividends. It’s passed along to the policy owners in the form of tax free dividends. Meaning when the insurance company does well, the policy owner does well. Additionally, with a non-direct recognition company, the performance of that policy isn’t going to be impacted when you take a policy loan, meaning your dividends, your growth within your policy is going to be exactly the same, whether or not there’s a loan against that policy.

The only consideration that needs to be taken into account. Is that loan interest, that’s the only cost that the policy owner is incurring on this loan. 

Tim: Yeah, and I think the thing that people miss or the point that a lot of folks miss is the fact that we finance everything we buy. So whether you finance through a bank or you finance through a life insurance company or you pay cash. Every one of those choices has a cost.

And it just, it really becomes an issue of where are you giving up the least amount of money. And I have yet to see a situation where people were not better off borrowing against their life insurance versus any other form of finance. 

Olivia: Exactly. 

Tim: And, and, and that’s, that’s purely from a numbers perspective.

But, the hidden value when you’re borrowing against a life insurance company is the fact that you’re in control. You’re in control of the repayment process. You’re in control of the borrowing process. You’re in control of everything. And because of that, that’s the key for business owners. Most business owners, again, started their business because they want to control their own destiny.

But yet the bank owns them. Now, when we can cut the bank out and put them in control. Oh, my God. That’s a game changer. 

Olivia: Exactly. 

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Olivia: I mean, how many business owners have we worked with where, by simply extending the amortization schedule of their existing loans and stop, you know, giving away every single dollar we make to the bank.

Think about the impact that would have on your business if, let’s say, you were able to cut your monthly obligations in half. And instead put that other fifty percent towards an asset that you own and control and could still leverage against without impacting the growth on that asset. 

Tim: Yeah. And that’s a really neat technique.

So a lot of times what we’ll do is we’ll actually do that. We’ll extend the amortization schedule to free up cashflow and use the cashflow to fund a succession plan or a key person retention plan or an exit strategy. And now again, we have that money building up. Now we can utilize that money to ultimately go back and pay off that loan.

So now instead of taking, let’s say half of the loan and using that to build an asset, now you’re taking a hundred percent of the loan monthly loan payment and using that to build up and replenish what you borrowed and that really, again, puts the business in a much stronger position. And let’s face it, you know, the way things are shaking out, businesses are being squeezed from so many different directions.

Interest rates are up. Inflation is up. There’s turnover over on their, their workforce. You know, the great resignation. That’s a thing. That’s, you know, four million people every month left their jobs. 

Olivia: Willingly. 

Tim: Willingly. And then, again, now, just to underscore, businesses are dealing with the twin challenges of high interest rates and high inflation.

It costs more for inventory and supplies. It costs more to hire new people. And It’s costing more to borrow to capitalize your business, but boy, isn’t it great if you can be in control of that borrowing process? That, that’s just a game changer. 

Olivia: Yeah, and we say it all the time, whoever controls your cash flow controls your life.

And with our client who recently took that loan to finance the truck, they’re going to wait until their busy season when their cash flow is flush. To knock down that policy loan and the key difference between traditional financing and financing with the policy loan is once they start chunking away at that policy loan. They’re gonna have access to that hundred and fifty thousand dollars that they borrowed again, so that when the next thing comes up, they’re able to rinse and repeat they’re able to finance again using those same dollars.

Tim: Yeah, and, and that’s, that’s key because every payment you make on the loan reduces the outstanding loan balance, but increases the amount of equity you’re eligible to take next month.

Olivia: Exactly. 

Tim: Or whenever, whenever that time period is, you know, whenever you want to take another loan, you know, and that was another thing that he had asked me, he said, well, Is there any limit to how many loans I could take? No, you could take a loan every month as long as there’s, or every day. As long as there’s equity to borrow against, you have the, the contractual right to borrow it.

Olivia: Exactly. And that’s, that’s, I mean, what more could you ask for as a business owner? Access to cash when you need it, plus, you’re able to accomplish other planning goals, whether it be business succession, key person planning, employee retention. Or any of the other things that we deal with that we have to deal with as business owners.

And that are a lot of times avoided because of the complexities of this type of planning. And not only that, but the cashflow that goes into this planning, you know, there’s a price tag to solving these problems, but by looking at the business overall, looking at the cashflow, looking at the debt, seeing where we’re able to free up the cashflow, you’re able to keep the cashflow the same.

Or close to the same, have minimal impact on it, because whoever controls the cash controls your life, you need cash flow, it’s the lifeblood of any business. So we want to make sure that we’re achieving these goals without pinching the cash flow, because at the end of the day, you need the cash flow, you know, and you need to accomplish these planning goals, because the longer you push it off, a lot of times the more expensive it becomes. 

Tim: You know, and one of the other things that, You know, MetLife did a survey and found that over sixty percent of business owners think that a recession is right around the corner. And if that’s the case, having access to cash is going to be the key because the first thing that’s going to dry up and it’s the first thing that dried up during the 2008 financial crisis was access to capital.

That’s when banks started calling in their credit lines and, uh, whether it was a home equity line or a business line, they closed out those lines. Now, just when things are getting tough and you need to access money more than ever, now the bank is pulling the rug out from underneath you. You know, there’s a saying that a banker is somebody that’ll sell you an umbrella when it’s sunny and take it back when it starts to rain. 

Olivia: That’s the perfect example of that. And, and as the business owner, you have to think about it from the consumer’s perspective as well, because interest rates increasing, inflation increasing, and a lot of the employees, most of the employees out there aren’t increasing their income to keep up with these increasing costs. We see that in the increase in consumer debt that’s going up quarter after quarter and is actually at an all time high all across America. They’re not decreasing their, their lifestyle. They’re not able to, in a lot of cases, they’re keeping up with their lifestyle, but the cost of that lifestyle is increasing month after month after month.

Even if the Fed is saying that, you know, inflation is at 2%, they’re not counting the things that really matter that are actually impacting us as Americans. And that’s going to be felt by the consumer as well as the business owner. 

Tim: Yeah, everything is going to certainly pass down to the consumer, right? So when the things dry up for the consumer, they start buying less.

And when they stop buying less, that affects the business. So again, having access to cash. Not only can position you to be in control, but also can position you to not be a victim of a recession, and actually put you in a position to take advantage of the recession, where now if you have access to cash, maybe you can go and buy somebody, buy some inventory from a competitor who’s going out of business.

And guess what? You’re going to buy that inventory for pennies on the dollar.

Olivia: Yeah, yeah. I mean, I, I believe more millionaires are made during recessions than any other time. And it’s not for lack of preparation. Those who have cash are going to be able to take advantage of the opportunities when they arise.

When the stuff hits the fan instead of being a victim of this recession. And the key is to have access to cash, to be in the position where you’re able to take advantage of the opportunities rather than being a victim of the external world.

Tim: Yeah. And that just, you know, being in control, having access to capital puts you in control.

And when you’re in control. Now, you’re in a position where you can start taking advantage of opportunities, and boy, there is no small price tag you could put on the freedom that that creates.

Olivia: Exactly. If you’re a business owner and you’re worried about the recession and you’re ready to become an opportunist in this next recession instead of a victim of it.

Be sure to check out our website at tier1capital.com to schedule your free strategy session today. We’d be happy to go over your specific situation and talk about how to position you to take advantage.

Tim: Thanks for joining us. We look forward to seeing you again.