How Business Owners Can Get Fiscally (as Well as Physically) Fit in the New Year
One solution: Set up a life insurance policy from which you can sidestep the banks and loan yourself money, in a crunch.
With the new year, many entrepreneurs resolve to get physically fit. But fiscal fitness is just as important: When it comes to the future of your own business, are you fiscally fit enough to face any challenge?
Are you prepared to endure fluctuations in your markets, new competitive challenges, withering credit and the trials of maintaining cash flow even when receivables are lacking? Or are you out of shape, coasting along and hoping for the best?
Unfortunately, many businesses are not in fiscal shape to weather the challenges they face. We know that nine out of ten start-ups fail within their first four months and that cash flow problems are a top cause. Here’s one example:
I work as a fiscal investigator. And, a few years ago, I got a letter from a business owner pleading for a solution to a problem that was all too common at the time. He had owned a successful wholesale business for 11 years, supplying 3,000 customers in seven states. Then banks started calling in loans right and left.
This man's own bank shut down all commercial lending, called in his loans and canceled his line of credit. Can you imagine the nightmare a business owner faces being dependent on those loans to make payroll? Without capital, he was in dire straits.
“I have plenty of orders from my customers," he wrote to me, "but I don’t have the cash flow to replenish inventory to supply my customers. My vendors require up-front payment on my purchases . . . I laid off seven employees, including my own daughter, which has crushed my spirit. It’s now only my son and me running routes, making deliveries and rationing what inventory we have left. I need funding, and I need it now.”
Those who forget the miistakes of the past are condemned to repeat them.
I’m not sure if this man's business survived, but what he went through is all too familiar. Businesses routinely rely on banks and financial institutions for a ready source of financing. But when the economy contracts -- just when our mom-and-pop companies need help the most -- banks are most likely to call in their loans and shut off lines of credit.
As Mark Twain so aptly put it: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”
The story I just told -- and Twain's wise words -- are reminders that the best time to prepare for the next recession or downturn in your industry is now -- as in, today. We must fight financial flabbiness and build the muscles that will allow our businesses to be lean, agile and resilient during hard times.
After all, no one knows when the next downturn is coming. So, if you wait until that downturn happens, it will be too late to take the steps you'll need, to ensure you have the money you need, when you need it.
To help ensure that we live out our golden years and see our grandkids graduate high school and college, we can't ignore our physical health. And, in the same way, we can't ignore our fiscal health. A business is fiscally fit only if it can pass the stress test of financing and cash flow. That means building your financial muscle before a crisis.
How smart business owners get access to capital when no bank is lending.
Here's another example illustrating an issue almost every business owner will at some time face: The owner in this case was Jerry Thiebold. Major clients of his ten-year-old medical equipment repair business were late in paying him. He needed $15,000 to make his quarterly estimated tax payment.
A few years earlier, looking to diversify his 401(k) portfolio, this 55-year-old businessman had taken out a high-cash value, dividend-paying whole life insurance policy. When his tax bill came due, he realized that he could lend his business $15,000 from his personal policy.
By having pre-prepared to become his own source of financing, Thiebold was able to repay his loan and deduct the interest he was repaying himself. (Interest on these loans is tax-deductible, just like business interest in general). He set his own repayment schedule.
Then, even though the money in his policy was on loan to his business, the policy continued to grow as if he had never touched a penny. And he got the money he needed quickly -- without a credit check, without having to submit financial statements, without needing the approval of a loan committee or having to deal with any bureaucratic hassles.
Thiebold is among many business owners who have used life insurance policy loans to avoid crushing interest payments while financing smart operational investments and personal costs such as their children’s education -- all while saving for retirement.
Three take-aways for business owners who aim to be fiscally fit:
Recognize that your business needs steady access to cash. Whether it's to seize the next growth opportunity, to bridge receivables or buy necessary supplies, businesses require a ready source of capital.
Don't rely on bank loans. Even when one is available, a loan from your friendly banker may not be a great option. You never know when banks will get tight-fisted with small business loans. When you can get a loan, the amount you get, the repayment schedule, and the interest rate you pay will all be under the bank’s control -- and not necessarily be beneficial to the health of your business.
Consider other options, by thinking outside the box. Using the kind of cash value life insurance I have described puts you in control. You can arrange to pay yourself back on a schedule that works for your business. The interest you pay (often lower than the bank’s rate) can ultimately benefit you through policy dividends.
To get fiscally fit, don’t wait until the economy, your banker or a shift in your business environment puts your company on a treadmill. The time to start building the muscle of financial self-sufficiency is now. Now, get out there and get started! (You might want to hit the gym, too.)