E43: How to Make Private Family Financing Work in Your Business

Nate: In this episode, we will discuss how businesses can use the Infinite Banking concept to help them solve their need for capital, potentially lower their taxes, and even keep their employees from finding work elsewhere. She’s Holly, and she helps people find financial freedom.

Holly: He’s Nate, he makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Nate: Couple of disclaimers here, I guess you could say. This is gonna be more tailored towards business owners and it is going to be more tailored to the concept that we teach here at Living Wealth: Infinite Banking, maybe even more so than we have in the past. If you’re not a business owner, I think there’s gonna be a lot of valuable information in here for you anyway, but just a heads up, it is gonna be more focused to them. If this is one of the first episodes you’ve listened to, you may want to go back and review a couple of the past episodes just simply because this one is gonna be a little bit more detailed and a little bit more in depth and it might go right past you if you don’t.

Without further ado, we’re gonna just start discussing a few things that Infinite Banking can help … And there’s many more, but we’re gonna focus on three things today that IBC, Infinite Banking, can help business owners in their quest to create wealth. Holly, what is the first main benefit or use for IBC in someones business?

Holly: I think the first and foremost is capital. Businesses always need capital, whether it be to finance equipment, whether it be for inventory, whether it be for overhead, whether it be for expansion. They’re constantly in need of capital and typically, if a business doesn’t have capital, what they have to go out and do is either raise the capital or they have to go and find somewhere to borrow that capital from at interest rates, often, that are high or higher because there could be a little bit more risk, but the other reason is because in order to do or work or be able to expand, most of the time, we have to borrow that money from a separate entity in order to actually help our business grow and use it.

I’m gonna say capital is number one. I’m gonna turn it over to you and say how can we use the capital in our policy to actually maybe help, whether it be with equipment or inventory or overhead. Just those are a few that capital can be used for and how we can use that policy through the Infinite Banking concept to actually fund capital.

Nate: Every business in the world needs money, needs capital, and it’s gotta come from somewhere. We have overhead in our business, we have inventory to buy, equipment to buy, bills need to be paid. If we’re trying to expand, then we can never have too much money in that case. In the business, the money needs to come from somewhere. A couple of places it can come from, it can come from the fact that you’re profitable and you’re generating revenue and you’re just saving some of that money and just leaving it sitting there in the company account so that you can spend it on these things. If you’re not making enough, well, you’re probably in the group that is having to borrow money or lease some of the things that they’re doing. You know, maybe you get a line of credit to help you purchase inventory or to cover overhead or for equipment.

What Holly and I are trying to do is say, if we can figure out a way to start replacing the traditional forms of capital, which would be just cash in your account and in bank money or leasing money, to do the things you’re trying to do. If you can start building up a policy that will cover all the expenses you have in your business, you can start making a ton of money by being the bank. It’s one of the best places in the world to do so to help fund equipment because right now you’re making payments, let’s say, or you’re spending money on inventory.

You’re spending cash on it or you’re making payments on equipment. After you buy the inventory, do you have any money? The answer is typically no. You’ve got inventory, you don’t have any money. And the same thing for the equipment. You’re making these payments on the equipment and someone else gets all the money for it. If we could show you how to get some of the money back or all the money back for the equipment that you buy … Not just have the equipment, but have the money back … by being the bank, it can be huge. It just happens to be that policy is the best place that we know of to fund those types of things.

Holly: Even if you can’t start out by getting all the money back that you’re borrowing to fund the equipment or your overhead, and you can even just take over a portion of that and bring the money back into the business, it actually will ease up on the amount you have to borrow, but it actually increases cash flow to the business. So, you might not be able to take it all over initially, but over a period of time, even if you could just take over 25% of what you’re actually having to borrow to fund equipment and your overhead expenses and bring it back into the business, it drastically changes the cash flow of the business.

So, in your mindset, don’t just look at, “I have to take over all of it all at once,” but even a portion of it can make a huge difference. Because most of us, what we don’t realize is the amount of money we’re spending in interest just to keep our business afloat or to keep that equipment in good use. Just to change places with the bank to be able to take over some of it is better than doing nothing at all.

Nate: One thing I caveat here is most of us have a present value bias or a short-term focus, what can you do for me right now or this year. Very short-term minded, and it can kind of hinder people from building wealth the way they really probably ought to. Wealth is typically built over a lifetime, and we continuously try to build more and more and have our money work for us in bigger and better ways.

I bring that up simply because sometimes businesses, they have so much going on with their need for capital, and we come in and show them that, “Hey, you would make so much more money if you would use your policies to start funding this.” Maybe they say, “Well, I can’t fund a policy in the next couple of years that’s gonna be able to do everything,” and then they just kind of fold and they say, “I can’t do anything, then. It’s not worth doing it at all.” But as Holly said, it doesn’t matter if you do everything or one thing.

In other words, if it takes me 10 years to build a system that could get you 100% of the money back for every piece of equipment and all the inventory you buy for the rest of your life, is it worth the 10 years timeframe to build it? So, don’t have a present value bias, don’t look at the short-term and only see what we can do in a year or in six months. Don’t bring that to the IBC system. Think long-term. If I build it, the wealth will come type of thing. If we can get the foundation laid and start building it now, your life will be totally different five years, 10 years from now, to the point where you could be making so much money, having so much money flow back to the policies, you wouldn’t even believe it compared to where you’re at today.

Holly: And I think, Nate, too, it’s that mindset of look at life, and even as building a business, is that a business isn’t built overnight. It takes many years, and most of the time, it’s six, seven, eight years to be profitable nowadays in a business. So, if you look at the fact of that you’re not running a 100 yard dash when you’re building your business, but rather you’re running a marathon, and you know it’s gonna take 10 years to get there, you would invest the 10 years if you knew nobody, from 10 years on, nobody could catch you or that you wouldn’t have to actually use a conventional bank moving forward, because the money would be going through your policies. You would just be amazed at what you could do.

Don’t have a short-term vision. Have a long-term vision because most of us, when we build a business, it’s not just to have for two or three years or even five years. It’s either to leave a legacy or it’s to build something that will last a lifetime and far exceed what our expectations are. So, have that same mindset. Don’t have a short-term mindset, have a long-term mindset. And before we go on into talking about not just capital, but even the tax advantages, we’re gonna take a short break and hear from our sponsors Living Wealth.

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Nate: Welcome back to Dollars and Nonsense. As Holly just finished up before the break, talking about wrapping up the capital and thinking long-term. It’s not just recapturing money that’s leaving, and making profits on your capital tax-free, and all these really cool things that we can do. There’s another side to this as well with doing IBC, that if we set things up correctly, we may even be able to reduce your taxes by showing you, as a business, how to create deductions with creating interest expense back to you. It can get really fun. Not only can we get all of the money back, not only can we be profitable and doing a lot more things because we have the policy as our funding source and we’d love to show you how to do that, but we can also show you how to reduce your taxes. So, how is that possible, Holly?

Holly: I think it’s just like with the bank. If you borrow from a bank as a business, that interest expense is deductible. Therefore, if you’re borrowing from your life insurance policy, you also can deduct that interest, but the beauty of it is you can also, possibly, if you do it the correct way and you allow us to guide you through it, also use that deduction and that interest you paid to yourself or your life insurance policy to actually create additional wealth by putting it into a policy or funding additional policies. It’s that interest expense that you’re gonna be able to deduct. Let’s say a bank is charging you 10% and you charge yourself 10%, then that money that you paid as interest actually goes directly back into the policy or it can fund a new policy.

Nate: Most of the time, you get a tax deduction whenever you write a check somewhere and you have an expense. The more expenses you have, the lower your taxes. The problem with expenses is that you don’t have any money. It’s nice to have a lower tax bill, but if you just write checks to increase your expenses, well then you don’t even have money. What’s really interesting about the IBC system is that we can actually show you how to take a deduction or create an expense, but because the interest is paid back to the policy and because of the growth of the policy, we can actually, most of the time, recapture all of the interest.

So, we create an expense, but we also get to keep all the money. It’s a really interesting idea. Now, we’re not tax advisors, so please don’t take what we’re trying to tell you for absolute truth. Please talk to your own tax advisor. We’re just trying to give you ideas for what we are doing, what we’ve talked to our advisors and they are perfectly on board with it. So, being able to lend money to your company to offer that instead of getting money from a bank to have the capital can actually create tax deductions that you get to claim, that you get to write off, reduce your taxes but still keep the money. Very interesting. One of the only places I know of that that’s possible.

Holly: I think one of the only products that it’s possible with too. Most of the time, those expenses are written to other people or other entities or third-party debt, but can you imagine that it’s written back to the life insurance company of which you’re a shareholder, and you get the benefit of that. So, in reality, you’re once again, and we talked about this earlier, making your money work for you without having to change that lifestyle. You’re creating cash, like what we talked about in point number one, additional capital for your business to use. If you own a business, this is one of the best possible scenarios for you, is to be able to put in money into a life insurance policy and create and loan that money to your business to be able to reduce taxes.

Now, it just helps with taxes. It doesn’t eliminate taxes at all, but it helps. Can you imagine reducing your taxes already? All you had to do was change where your money went. The very last point we really wanted to talk about today is how to actually use a life insurance policy to keep employees or maybe key employees through a non-qualified plan and what that can look like for them.

Nate: It is possible. If you’re a business owner, you know that you have some A-players you certainly do not want to get rid of, you want to try to keep them with you as long as you possibly can and keep them satisfied and happy working there. Some, you may or may not be what we would call irreplaceable. Sometimes, maybe the idea of some employees that, if they left, we wish they wouldn’t, but it wouldn’t have the business grind to a halt.

What’s really great about policies is that we can actually use them as non-qualified benefit packages, retirement packages, certain things like that, where there’s a discriminatory nature so not everybody has to get the same that’s working for you. You can kind of earmark the higher quality employees or the ones that are in the executive team potentially, and you can keep them there, hopefully, by giving them some benefits. Life insurance happen to be one of the best places to do that.

We’ve seen a lot of people buy policies on their key employees and use the cash values that are building up over a vesting schedule, to then, after maybe 10 years or 15 years or maybe when they hit retirement age, however you want to set it up, you can get it to the point where you’re using that policy maybe to pay them kind of a pension or to give them a buy-out or something like that. What’s awesome about this strategy for the business owner, it’s very valuable as a great benefit, either as a bonus structure at the end or as a pension type of deal for the employee, but guess who owns the policy the entire time? Guess who can work with the money the entire time? Guess who gets to own the policy even after the pension’s been paid out, potentially? Guess where the death benefit goes to? All of that actually comes to the business owner or his family.

It’s a really unique way that you can, without taking any risk, can fund a benefit package that no one else is really thinking of doing. It’s non-qualified, so you can pick out who you want to use it for. It can not only benefit the employees, but, in a roundabout way, actually benefit you, your business, and your family with this policy that’s actually an asset that you own. We are gonna be using it and earmarking it to help the employees that you have and they’ll be very happy with it, but in the end, you also will have some benefit from it. It’s very unique in that way.

Holly: I think, too, another benefit of it, Nate, is that you also actually get to help even the employee. So, something happens with the employee, there’s a loyalty or an ability to say, “Hey, this has happened. Can we do this or that,” and it gives you a freedom that you don’t have with qualified plans for your employee, whether it be paying out bonuses, like you said. Or maybe they have somebody that they need to go take care of and they need to take time off, but you don’t want to actually replace that employee because they’re so beneficial to the business or they’ve had longevity and been loyal to you.

By having this non-qualified plan, you can actually help them or the business while that person is gone during that time of loss. Or, let’s say something does, unfortunately, happen to the employee and you’re gonna have to train or bring somebody new in. That life insurance policy helps cover the cost of training somebody new and hiring somebody and bringing them on board because you had it on the key employee.

I think there’s just so many aspects that we don’t think about in regards to purchasing life insurance on a key employee and actually the benefit it can have, even to their family. Where some other business or job might want to poach that employee from you because they know how good they are or how talented they are, this non-qualified plan also can help them keep them there with many different ways. You can go in in how you can use that, but it’s really on an individual basis, but I would say we all have those employees, like Nate said, they’re A-employees, they’re A-players, and they’re the ones you want on your team. You really want to keep them and you don’t want them necessarily to go somewhere else and look somewhere else.

This is an added bonus that you can use to keep them on your team and keep them working for you. Plus, you’re gonna give them something to the business that can’t be replaced, and that’s loss of income if they go somewhere else because at least you have a policy to help with that, but the other thing is is that you also get to benefit by using that money. The key. The money you’re putting into the policy, you get to control as the business owner and determine how that money is used.

Nate: Just to kind of throw one more thing out there, we’ve had some business owners even implement a similar strategy to a 401k program for their employees, but instead of it being through a 401k or a qualified plan, and it works better for small businesses, but it’s set up where the company can fund maybe half of a policy while the employee funds half of a policy.

It’s very unique, especially if you’re a business owner and you really love IBC, maybe you would rather not throw money into a 401k where it’s locked up for the employee until they’re 60 or retired with taxes that are all gonna be owed at that time, and all this stuff that we would talk about or reason we may not care for that program. You don’t want to offer that, but you want to have some sort of benefit for everybody, you can set up a policy in a similar way. It’s non-qualified, so once again, you have a lot more control of how you set it up. There’s not nearly as many rules, but it can be really unique in that way.

Holly: Like we’ve been telling you guys, you gotta start thinking outside the box. Even as business owners, we don’t think about the fact that really, even as a business owner, we should be in two businesses. We should be in the business that we’re doing, whatever that might be, and we also should be in banking, making our money work for us. This is just another idea of thinking of using life insurance to fund capital, to lower taxes or help benefit in lowering taxes, as well as to keep those A-type players on your team and give them an option that’s not just a qualified plan. Think outside that box. If you knew you could do something that didn’t tie up your money and the business owner was able to help you with that, how quickly and more beneficial would it be not only to the employee, but to you as the business owner.

Nate: Absolutely. You’d be very unique in businesses in offering something like that, and potentially even having some advice for them as what you’re doing with it. With that being said, we’ve really hit our time today for this podcast. Thank you for joining us today. This has been Dollars and Nonsense. If you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources, please visit LivingWealth.com/e43.