Understanding Immediate Financing Arrangements (IFAs): A Viable Strategy for Business Owners in Canada
As a business owner, there are times when you might find yourself needing quick access to capital for unexpected opportunities or challenges. Traditional loans and credit lines can take time to arrange, may even have some hiccups to get approval, and sometimes you just need the funds right away. One lesser-known but highly effective strategy to gain immediate financing in Canada is through an Immediate Financing Arrangement (IFA), specifically using an insurance policy as collateral.
In this post, we’ll dive into how this strategy works, who could benefit from it, and how to assess if you, as a business owner, are a viable candidate for using an IFA with an insurance policy.
What is an Immediate Financing Arrangement (IFA) in Canada?
An Immediate Financing Arrangement (IFA) is an effective financial strategy that merges life insurance with lending to offer liquidity, all while preserving insurance coverage. This approach is particularly advantageous for individuals and business owners who need to sustain cash flow while safeguarding their long-term financial goals. In Canada, the most commonly used type of insurance policy for this arrangement is a permanent life insurance policy, such as a whole life or universal life insurance policy. These policies have a cash value component that can be borrowed against, making them an attractive option for securing immediate funding.
At it’s core, an IFA allows you to quickly borrow against a life insurance policy shortly after purchasing it, or even a number of years after purchase. This strategy works by using the policy’s cash value as collateral for a loan, typically obtained from a bank/financial institution or the insurance company itself. The funds borrowed can then be used for a range of purposes, such as investing in a business, acquiring property, or achieving other financial objectives.
A major advantage of an IFA is that it enables policyholders to retain liquidity while benefiting from the security and tax advantages that a life insurance policy provides. The loan is often structured in a way where the policy’s growth covers the interest payments, meaning the borrower’s out-of-pocket costs can be minimal or in some cases, nil.
How Does the IFA Work with an Insurance Policy?
The process of accessing funds through an IFA using an insurance policy involves the following key steps:
Insurance Policy as Collateral: A permanent life insurance policy accumulates cash value over time. This cash value can be borrowed against, which serves as collateral for the loan. Business owners can use this value to secure immediate financing.
Loan Amount: The amount that can be borrowed is typically a percentage of the policy’s cash value. Some lenders may allow you to borrow up to 90%+ of the policy's accumulated cash value or annual premiums, though this can vary based on the lender and the type of policy.
Loan Terms: The funds borrowed through the IFA are typically short-term loans, with repayment terms ranging from a few months to a few years. Interest rates on these loans can vary, and depending on the arrangement, interest may be charged on the outstanding loan balance.
Flexible Repayment: Since the loan is secured against the cash value of the insurance policy, there is some flexibility in repayment terms. If the loan is not fully repaid, the outstanding amount may be deducted from the policy’s death benefit proceeds, upon the death of the insured.
Access to Capital: One of the main advantages of using an insurance policy for an IFA is the speed at which business owners can access funds. The process is generally much faster than traditional loan applications, which can be critical in urgent business situations.
Who Benefits from an IFA Using an Insurance Policy?
While this strategy can be useful for a broad range of business owners, certain profiles of entrepreneurs and high-net-worth individuals will likely benefit the most from leveraging an IFA with their insurance policy. Here are some examples:
1. Business Owners Looking for Quick Access to Funds
If you're a business owner in need of quick capital, an IFA can provide immediate financing without the lengthy approval process that traditional loans often require. For example, if you need funds to cover unexpected expenses, seize a business opportunity, or bridge cash flow gaps, this strategy can help you access funds quickly and efficiently.
2. Entrepreneurs with a Permanent Life Insurance Policy
The IFA strategy is most effective for business owners who already have a permanent life insurance policy (such as whole life or universal life insurance). These types of policies accumulate cash value over time, which can be used as collateral. If you have an established insurance policy with significant cash value, this strategy becomes a more viable option.
3. Business Owners with Strong, Predictable Cash Flow
An IFA may also be ideal for business owners who have a reliable and predictable cash flow, as the loan repayment typically needs to happen over a relatively short period. If your business is financially stable and capable of generating sufficient cash flow to repay the loan quickly, using an IFA could be a smart choice.
4. Entrepreneurs Looking to Avoid Traditional Bank Loans
For business owners who may not qualify for traditional bank loans or who want to avoid the paperwork and time-consuming approval processes associated with banks, an IFA offers an alternative financing solution. With an IFA, lenders focus more on the value of the insurance policy as collateral than on your credit history or other traditional lending criteria.
5. Owners of Family-Owned or Small Businesses
For many family-owned businesses or smaller entrepreneurs, access to capital can be more difficult than for larger corporations. An IFA offers a way for these businesses to unlock value from assets they already own (such as an insurance policy) to support growth, manage cash flow, or navigate tough financial periods.
6. Business Owners with Large Retained Capital
Business owners with large retained capital can benefit from an IFA by using their retained earnings to fund a life insurance policy, which then serves as collateral for a loan. This strategy allows them to access liquidity without having to sell off business assets or disrupt operations. Additionally, it enables them to retain control over their capital while gaining significant tax advantages and maintaining long-term financial security through the policy's growth.
Advantages of an Immediate Financing Arrangement
Liquidity: IFAs allow access to significant capital without liquidating assets or reducing insurance coverage.
Tax Efficiency: There are multiple tax benefits to using this strategy: 1) The growth within the life insurance policy is tax-deferred, 2) there wouldn’t be a need to withdraw funds from the business as income, and 3) in some cases, the loan interest may be tax-deductible.
Estate Planning: By maintaining a life insurance policy, an IFA ensures that your estate planning goals are protected, even as you utilize the funds for your business or other investments.
Flexibility: The funds borrowed through an IFA can be used for a variety of purposes, from business expansion to personal investments to even personal lifestyle spending.
Continued Growth: The cash value within your insurance policy continues to grow, uninterrupted, so you can benefit from long term appreciation.
Recycling: You can borrow back multiple times, even after the original loan has been paid off, allowing to address future needs as well.
An IFA using an insurance policy can be a powerful tool for Canadian business owners who need quick access to capital. By leveraging the cash value of a permanent life insurance policy, business owners can secure short-term financing without the lengthy processes typically associated with traditional loans.
Although an IFA provides several advantages, it's important to evaluate the potential risks and costs involved. Factors such as loan interest rates, policy performance, and lender terms can influence the success of an IFA. It's recommended to collaborate with an experienced Financial Professional to determine if this strategy is in line with your broader financial objectives.
If used strategically, an IFA can help unlock the full potential of your business—whether it’s managing cash flow, seizing new opportunities, or navigating a financial challenge. Reach out to us to explore whether an IFA is the right financing solution for your business.