STOP Listening to Your Accountant… Unless They Understand THIS!

The dynamics of the relationship with the wheels of the banking system shift over a number of years after the business owner has done a good enough job proving that they no longer need the bank's money.

You know, let's do everything that the accountant suggests I do and everything that happens here and it's probably fine, it's probably going to work out for him, okay?

But that policy loan is unstructured. The corporation controls the repayment schedule.

The first business owner is James. And so he, as I mentioned before we started recording, so he's the guy, he reads all the mainstream business books, he follows the conventional financial advice, he trusts his accountant implicitly, his business is doing good. So he's got a manufacturing company, they do somewhere in the range of 2 million bucks in annual revenue. And he's really focused on growth, right? So his accountant tells him the same thing every year. Max out your RSP contributions, keep the money in retained earnings for business security. So have ready access cash available, pay off any business debt as fast as possible, use bank loans for expansion, take a salary, so draw a salary from the business, pay taxes on that income and then just invest whatever's left over in terms of your disposable income, invest it in the markets. And so that to James sounds very reasonable and really responsible, right? So, but here's the thing. He doesn't realize that he's working harder than his money ever will. And then you've got, on the other side of the coin, you've got Alex. And he's doing things differently, similar business, practically the same revenue, same industry. But he's not following Alex, isn't following traditional financial wisdom. He is building his corporate owned system of high cash value corporate owned life insurance contracts and he's using dividend paying whole life insurance to achieve that. And when he discovered the infinite banking concept, you know, we're just discussing this, when he discovered that he realized something that James never did. And that with James in his format, he was handling all that money, his business was handling all that money. But he wasn't in a position of control, whereas Alex was in a position of total and absolute control, especially as it related to financing the things that his business needs. And he doesn't have capital sitting around in retained earnings where it's subject to tax risk. And he's not parking it in investments that he can't touch. He's funneling that cash into these corporate owned high cash value policies where he's just able to do all the things that James can't. And so what, what comes up for you when you think of these two business owners. And we'll dive a little deeper into the strategies that they deployed and what the outcomes were.

Well, it's a couple of things. I mean, number one, you know, for our, for our course, American US listeners, 401k RSP are virtually the same thing. Yeah, you can put lipstick on a pig, but it's still a pig. So I mean they have, they have very similar.

Aspects to them. I wouldn't say they're identical, but they're definitely the most closely aligned as far as tax qualified financial plans are concerned.

The mainstream advice, I mean I'm of the mindset that mainstream, that isn't something I want to stream.

There's, there's far too much mainstream that I don't want to participate in. And I think there's an awful lot of people who are just like me, Jason, probably just like you or fed up or fed up with the, the same information that seems to be canned. It's literally like you, you could open up, grab your can opener, you can open up. And what it is is this pre, packaged, preformed food. Well, that's a lot of the media that you're getting and it's also a lot of the financial advice that you're getting. Okay, it's canned. And it's been canned for 50 years. Yeah. And the variability that's been there every once in a while, every five or six years or some new thing or new like tax dodge or slight adjustment that's going to save your bacon and make everything better. And it's the greatest thing since sliced bread. And then the IRS or the CRA, they wait seven to 10 years because they're too busy dealing with the things from 14 years ago before they finally get this thing that they know is on their radar. And then they say, ah, you know what, now we finally cleaned up all those files, it's time for us to dig into the stuff that happened seven years ago again with that, you know, sexy new tax dodge mechanism. And then we're going to start going after those people. And those people often are wealthier individuals, high performing professionals or business owners. And it's like cool. You got this amazing advice that wasn't tested. It didn't have the test of time to be, to go through a legal court system or whatever it is. And the end result is it sounded really good but you end up having egg on your face. Okay? So I think there's a lot of that, that takes place in the financial realm and people, whether you've personally discovered it yourself. If you haven't, you've probably met someone who has. They've either gone through that challenge or they've gone, you know, we've all experienced some type of financial pain. And I'll put my hand up, man, I got some stories I got. I know I've done a couple of webinars, I call them two by four moments where you literally get Tommy boy smashed in the face with two by four. I've had that happen to me a lot. I'm hoping it won't happen so frequently moving forward. But I'm a fallible person and things happen. So recognize that whatever pain you've gone through financially or the people that you know that have gone through it financially, you're not alone. Someone else has experienced it. So whether it's something in your business, an economic shift or what have you, or maybe it's taking it on the chin in the marketplace because the markets are down. Maybe at the time of this recording, you own Tesla stock over the last two weeks and because there have been, you know, they've been napalming and scratching up Teslas, you saw some of your financial value go down as the stock price plummeted. Like, how on earth could you have ever predicted that? Like, there's no possible way you could have predicted that could have impacted your financial life. But that's one example where you don't have control. Just one isolated example. And so for James, James went through this whole, you know, let's do everything that the accountant suggests I do and everything that happens here, and it's probably fine, it's probably going to work out for him okay, but he's always going to be at the beck and call of the marketplace, of the economic whims and turns that he has no control over. And if he needs liquidity, unless he is maintaining sufficient liquidity in the business on the books, he's got to sell other assets, clear out other things, take a big tax hit in order to solve major problems. And he's probably most likely, maybe, but generally speaking, most likely not very well protected from a quote unquote insurance standpoint. So if he's got business partners or what have you, is there a proper buy sell arrangement in place? Like if he wants to be in business a long time frame, if they've solved that with term insurance, eventually they're going to run in a position where they won't have that problem solved anymore because the term will expire, they won't continue that method. So there's A number of factors from a business structure that probably aren't solved on his end, that versus we go to Adam. He's, he's doing a different path just through the virtue of some of the decisions he's making. He's, he's pre solving almost a variety of challenges and problems that will most definitely occur. He's pre planning for the day where he will no longer be a part of the business.

That's a great point. And so let's look at this. Okay, so if we were to look at, let's just call it the business growth phase. Okay, so there's two different strategies, right? You've got James, who is in a position where essentially the banks own his cash flow fair statement. And then you've got Alex, who is in a much different position where he's able to handle a financing decision much differently. So James at year five in his business, let's utilize that real example. He needs a half a million bucks. He's got to scale his operation. So his accountant says, well James, why don't you utilize some retained earnings as a portion of that half million that you need. But you know, James is warned of the tax implications of doing that. And then take out a business loan from someone else's bank and you're going to be at 8% interest on that loan. Well, James does a bit of math with his accountant. So they realize, okay, there's going to be a couple hundred grand in interest over 10 years. But he figures that's just how business works. And his accountant expresses the same thing. Like when you need access to capital, this is how it works. You borrow from a bank, you repay on the bank schedule, principal and interest. And he's completely dependent upon the bank for his expansion. And so just like it was, I guess, when he bought, you know, equipment to finance his inventory, manages cash flow gaps, he's paying interest and the bank is controlling the terms. Whereas with Alex, he had ready access to a policy loan directly from the life insurance company. So he was able to borrow against the cash surrender value of the insurance policy.

He gets the capital from the life insurance company. The lien for the loan is on the death benefit of the policy, not the equipment that he's buying to scale his operation. And so he's not interrupting any of that daily cash value growth. So his asset is continuing to bolster his balance sheet. His equipment's going to help his company produce more revenue. But that policy loan is unstructured. The corporation controls the repayment schedule and the simple interest on that loan was 6.5%. Simple interest is calculated daily, compounds once annually, and he's in a position of total control. There was no credit application, there was no repayment schedule that was dictated by the life insurance company. The policy continues growing uninterrupted even though he's got a loan balance. And after 10 years, the company repaid the policy. Loan recaptured the interest that would have otherwise been paid to someone else's bank. And Alex is feeling pretty good. Instead of essentially transferring all that financial energy, that 200,000 in interest to someone else's system, he's paying that interest back onto the books of the life insurance company that his corporation co owns. So he's got his own financial ecosystem.

That's a much different outcome.

It's very different. And like a couple things that come up for me and this, Jason, is like, you know, a common financial term or practice is the sinking fund, where you know, the business owner if in the early years of the business because they don't have any financials or decent financials or nothing to prove to a bank that they're worthy of the bank's money. So they have more struggles getting the bank's money in the early stage of the business. Now both of these guys have existing businesses. The two gentlemen we're talking about, they've already eclipsed that. So now because they're doing well and they've got years of solid books, now banks are calling them and saying, hey, we want to give you some money. So it becomes, it becomes hard to say no when they're knocking down your door saying, oh, we'd like to give you some money to expand your business. And you've, you've had those calls, Jay. Right. So I know, yeah, you get those. So versus the early years of the business where you're like, hey, I, I know exactly how I can expand. Can I get some money? And the bank's like, I don't know, kind of a second class citizen. I don't think we're going to give you squat. Right. So the dynamics of the relationship with the wheels of the banking system shift over a number of years after the business owner has done a good enough job proving that they no longer need the bank's money. That's when the bank wants to give it to you. It's a very weird dynamic. So just on a surface level, just consider that for a moment, you did good enough on your own without their help or the struggles of trying to get their help and all the pain and frustration attempting to get their money and if you've been in business and you had to do that, you know exactly what I'm talking about. I was talking with someone the other day. They just absolutely despise having to go through that Mickey Mouse paperwork and talking to some new young kid who just got out of school, he's 24 years old, trying to dictate the terms of a banking relationship when he's had his business for 20 years. Like, this kid doesn't know anything about my business. It's frustrating and it's also insulting to a degree. So you know what that pain is? You've been there. Now they're knocking down your door to give you your money, so you think you're over that hump. You're like, okay, well, no problem. I can expand my business however I want. But in the back of your mind, you got to recognize, like, remember that early pain. The model hasn't really changed. It's just that you've gotten much better at jumping through their hoops at some measure of speed. And you've probably hired someone, an internal accounting, a control financial controller, who's doing all that hoops for you. They're still doing it. You just don't see it anymore because you've created the leverage of human power. Right. But that's what's happening. So. So the idea of a sinking fund, it's an oxymoron. It's like jumbo shrimp. Like, why on earth would you want your funds to sink? Just, just consider that for a minute. You're going to build up your own capital and you want to use an accounting strategy to sink your funds again. It's just so bizarre. I don't understand. So when you go to use the third party money from the bank, you're making the wheels of the banking business turn. Yeah. Before the wheels of your business turns every time. All the time. Okay. Nelson taught us that. Now you might get, oh, maybe you can. It's easier to write interest off. Or you get better. They, they give you a statement at the end of the year. They give you a nice thing at the end of the year that you can use to write it. Like, there's some, maybe some simplicity there. But how many hoops do you get? What's the price that you have to pay to your, your life, your soul, your business, your energy and your effort of the team members you have hired to do all that work to go and get their money? There's a price tag to that effort as well that people don't quantify very well. So the Next thing that comes up to this, I want you to think about this Jason, okay? The ability to make time based decisions. Time based decisions versus demand based decisions. You're doing business with a traditional bank, you make decisions based on their demand. They can call the loan dupe. Most loans are demand based loans. If you don't make a payment or something happens, they can usually call it due. It's in the fine print that you have to do the payment structure according to them. If you buying a new piece of equipment, the equipment hasn't even been installed yet. It hasn't arrived at your shop, it hasn't been put into work. You haven't hired a new employee to train them on how to use, let's say it's a new CNC machine or something. You're manufacturing goods, maybe you don't even have a person trained on that new thing. You got to send them to another state for training. Like there's all this lag time of that new piece of equipment getting put into place before it's turning product that you can sell in the open market to actually receive the revenue necessary to make the payment. But the very next month you get the money before you bought the machine, you have to start making that payment. So that's all that demand based decisions on the bank's demand, not yours. Right. Versus we go to Adam. Adam is able to make time based decisions. So he takes the policy loan. He gets to control as the banker in the arrangement how he wants to structure his loan arrangement. He could start making payments right away. That's totally his problem. In fact, we would suggest that amortization chart, the whole works. But he could say, you know what, I'm not sure. This new piece of equipment, I know it's going to work well for our business. I don't yet know how quickly we'll be able to start to turn products, things that we're going to build with it into the open market with our existing customers to be able to generate revenue. It might take us six months to a year. So I'm going to take a payment holiday until we get to a point where I know we're turning. And once we start turning things that that machine produces, I'm going to take a percentage of top line revenue off of everything that every product that we generate off of the sale of that machine. And I'm going to make that the repayment process for my loan. Like that's a total control thing. And he's got the time to make time based decisions. So there's so much power in that. The feeling and the energy and the control feature that you have. Like, what is the price of control in your life? Ask yourself that question as a business owner. What price do you put on your level of control over your autonomy to make decisions in your business? If that is important to you in any way, shape or form, then there's all. The only way you should be thinking about finance your business is in a method that allows you that ultimate and total control. So you know, if you buy the machine, 500 grand, let's say, you know, a bunch of money comes out, bunch of money goes out. It takes you a while to start turning product. You start to repay that at the, at your schedule. You, if you, all sudden you're turning way more product than you think you can repay faster. There's all these things that you can do. Now here's the next thing I want. You think about this. Let's just use that $500,000. We got a $500,000 piece of equipment. You buy it. You have the two different guys. We got James, we got Adam. They're both making loaner payments. So the balance of the outstanding loan is going down. Okay, James is going down with the third party lender. Okay, traditional brick and mortar bank. And Adam, it's going down with the policy loan. But while it's going down with the policy loan, the cash value of the insurance contract is continually going up. So every day that he's got the loan out and he's making repayments and the balance goes down, he also has an asset increasing at the same time. So you have this one going up and the loan going down, which means his access to capital is actually rising every day. So every dollar of loan repayment that he does on the piece of equipment for 500 grand is a dollar that he can access again and repurpose for the next piece of equipment or for hiring a bonus to headhunt a key employee, a manager that's going to help, you know, move the business forward. So his ability to make decisions in a relatively instant period of time because of his capital capacity is just so far more enhanced than, than James.

Compounding dividends is like a runaway train. And once it gets going, it's the key to building wealth. And that's one of the reasons why I have so many policies as well. I don't invest capital in anything that I don't know. I don't care how appealing the investment opportunity is. If I'm unfamiliar with it, I don't invest in it. Keep reinvesting those dividends into more stock.