WWYD large sum of money and business

[countthestars]

**I realize this is a very privileged post. 

H and I own a business. It is profitable, but we have a lot of money tied up in inventory given the current state of the world/supply chain. When we bought the business about 2 years ago, the previous owners used to hold approx $750k in inventory. We are currently at $2.5M. Part of this is because we had to pre-buy for two large projects that we had already won to ensure we'd have inventory available, and part of it is because we are trying to stay ahead of delays/pre-bought popular products before price increases occurred.

We are a C-Corp. To reduce our profits, we paid ourselves bonuses through payroll at the end of the year and are not currently collecting a salary (basically pre-paid ourselves to hit last year's books). So we have a large lump sum of money sitting in our personal checking account right now. The business on the other hand has a LOC and some inventory specific loans that were taken out to help pay for the inventory we are holding.

Our current accountant isn't very strategic or helpful so we are in the process of looking for another and will be consulting there as well, but in the meantime I am wondering what MM would do with the money we are holding, that we paid personal income tax on (not sure if that matters). 

Thoughts:
1) We could invest it personally. If we do that, would you drop it lump sum into the market right now? Or do it slowly over the next few months?

2) We could loan it back to the company. I need to read the rules more carefully, but I believe we would just have to pay ourselves back with interest, but the interest can be lower than what we're paying the bank on the LOC, so we could save some money in interest there.

3) A combination of the two? Something else? 

We are talking about approximately $XXXk (lowish figures). I believe our LOC is around 4.99% and we have an outstanding balance of ~$700k so we wouldn't be able to get rid of all of it but could take out a good chunk. We max out our retirement and have enough money in savings that we wouldn't need this money in the next few years. We have no big spending plans in the near to mid future. 

PDQ details as I may DD later. Would love to hear your perspectives! 

[treschic]

I don’t know the specifics, but I do know that the owners of the company I work for do show personal loans made to companies they own in financial records I’ve seen. If you have a need for a loan, I think that could be beneficial to yourself and the company. I assume that’s why they do it as they technically wouldn’t need to do that (no cash flow or credit issues at all).

With that sum of money involved, I’d engage a new accountant that has experience with larger companies.

[ellipses84]

I would put it all in the market right now, if you don’t plan on using it in the next few years. Consider risk vs. time you’ll have it tied up in investments when choosing a balance of investments. If you are very risk averse, you could stagger it over time or do half. You should make twice as much in a long term investment than you could loaning it to the business

I don’t love the idea of loaning the money to the business, but I might the next time if you feel you’ll have more excess of salary and bonuses than you need in future years.

Obviously talk to an accountant and financial planner as this impacts your personal taxes and they can help guide you on smart business decisions. I don’t know if you have other employees but if you feel like you are set financially I’d consider focusing on a few areas in the business - paying off the loan, sharing the wealth with employees, saving carrying costs for a recession, and investing in some equipments/ software that will make work more efficient.

[ellipses84]

I always find it frustrating that there’s not one person you can go to for this type of thing. My parents have real estate investments and have a unicorn of a FP/ accountant who helps them with decisions. For you, it’s almost like you need a very strategic CFO and if that is one of your positions as the owner, maybe you could hire someone who does CFO type consulting for small businesses, then run things past your accountant and lawyer to verify their recs are acceptable.

[k3am]

I don't know the answer to what you should do with the money.

If you loan the money to the company, the LOC lender is likely going to require the debt to be subordinated to them and will have restrictions on if/when you can receive payments other than interest. I have clients that I expressly prohibit any repayment, even cash interest (PIK is always fine), to go out on shareholder debt, others who don't. Some that getting repayment on is a simple email request, and others that we would say no if they asked. So before you get too far down that road, be prepared to discuss it with your lender.

[countthestars]

Apr 28, 2022 16:42:43 GMT -5 k3am said:

I don't know the answer to what you should do with the money.

If you loan the money to the company, the LOC lender is likely going to require the debt to be subordinated to them and will have restrictions on if/when you can receive payments other than interest. I have clients that I expressly prohibit any repayment, even cash interest (PIK is always fine), to go out on shareholder debt, others who don't. Some that getting repayment on is a simple email request, and others that we would say no if they asked. So before you get too far down that road, be prepared to discuss it with your lender.

Thanks, this is definitely not something I had considered. My banker is awesome, so I can ask for his thoughts (it may even be in my contract!). 

[countthestars]

Apr 28, 2022 16:31:50 GMT -5 ellipses84 said:

I always find it frustrating that there’s not one person you can go to for this type of thing. My parents have real estate investments and have a unicorn of a FP/ accountant who helps them with decisions. For you, it’s almost like you need a very strategic CFO and if that is one of your positions as the owner, maybe you could hire someone who does CFO type consulting for small businesses, then run things past your accountant and lawyer to verify their recs are acceptable.

This is exactly what I'm looking for! I find it frustrating as well. Thanks for chiming in! 

[countthestars]

Apr 28, 2022 16:28:24 GMT -5 ellipses84 said:

I would put it all in the market right now, if you don’t plan on using it in the next few years. Consider risk vs. time you’ll have it tied up in investments when choosing a balance of investments. If you are very risk averse, you could stagger it over time or do half. You should make twice as much in a long term investment than you could loaning it to the business

I don’t love the idea of loaning the money to the business, but I might the next time if you feel you’ll have more excess of salary and bonuses than you need in future years.

Obviously talk to an accountant and financial planner as this impacts your personal taxes and they can help guide you on smart business decisions. I don’t know if you have other employees but if you feel like you are set financially I’d consider focusing on a few areas in the business - paying off the loan, sharing the wealth with employees, saving carrying costs for a recession, and investing in some equipments/ software that will make work more efficient.

Thanks again! Quoting each one separately so I make sure I don't miss anything. 

For the bolded - it's great advice and things we are working on (we switched software companies and prepaid for the next year, bonuses were 4x what they were last year!). The only problem in our situation is that paying off the loan doesn't bring down your tax liability, at least in a C Corp. We would have otherwise either used the cash to do that or not borrowed against the line to pay ourselves down. It's very backwards. 

[jlt19]

Apr 28, 2022 16:31:50 GMT -5 ellipses84 said:

I always find it frustrating that there’s not one person you can go to for this type of thing. My parents have real estate investments and have a unicorn of a FP/ accountant who helps them with decisions. For you, it’s almost like you need a very strategic CFO and if that is one of your positions as the owner, maybe you could hire someone who does CFO type consulting for small businesses, then run things past your accountant and lawyer to verify their recs are acceptable.

Our CFA has a CPA, attorneys and even insurance brokers on staff because he thinks everything should be tied together. We won’t utilize it all because we don’t need to but I didn’t realize the is wasn’t a normal thing.

[mae0111]

countthestars, depending on your personal assets, you may be able to work with a private wealth manager that could help you with this type of stuff.

DH owns his own company, but it's very different from yours. It's an S-corp with no inventory at all (consulting). Our wealth manager has been able to help us with all kinds of cash flow decisions - things our CPA (who specializes in small business) hadn't even heard of.

It may be too late for this now, but depending on the structure of your company, there's a lot you can do with your retirement allocation if you need to do something like that in the future.

I'm going to send you a PM.

[numbers]

Apr 29, 2022 12:07:15 GMT -5 mae0111 said:

countthestars , depending on your personal assets, you may be able to work with a private wealth manager that could help you with this type of stuff.

This would be my recommendation as well.

We started working with a high NW FA a few years ago and it's incredible the knowledge, options, and solutions he's been able to provide for our various money-related needs.

I'd be happy to chat more about it and how we found him if you'd like.

[sent]

I have been with an industry-specific accountant for 12 years and last year I started working with a financial planner he personally recommended. I would be sending an email asking them what to do as I would have no ideas better than just paying off some debt. Or maybe finally buying one of the things on my bucket list without guilt lol.