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If an IFA Frees Up Capital, Why Doesn’t Every Business Owner Have One?

Written for Business Owners

Key Question for Business Owners

An Immediate Financing Arrangement (IFA) can improve your company’s capital efficiency, so why isn’t it the right move for every business owner? What are the real-world factors that make it a niche strategy?

  • The Scale and Profitability Hurdle: An IFA is designed for established, profitable companies. Lenders have stringent requirements, often meaning your business needs to be able to sustain annual insurance premiums of $50,000 or more for at least a decade.
  • Your Comfort with Leverage: The strategy involves adding a loan to your company’s balance sheet. Many successful business owners are philosophically opposed to taking on new debt, even if it’s secured by an asset and used for investment.
  • Opportunity Cost of Capital: The funds used for insurance premiums, even though they are quickly replaced by the loan, cannot be used for other immediate needs like paying down high-interest debt or seizing a time-sensitive acquisition opportunity. An IFA is a long-term plan that must align with your overall business priorities.

As a business owner, you manage many valuable resources—your people, your time, and your capital. Every dollar has a job, whether funding growth, managing cash flow, or investing in new opportunities. When you allocate significant capital to fund essential permanent life insurance—for estate planning, a buy-sell agreement, or key person coverage—it can feel like that capital is no longer working for your business.

You may have heard of the Immediate Financing Arrangement (IFA) as a strategy that provides access to investment capital while keeping the permanent life insurance coverage in force. The IFA concept is compelling, but naturally leads to a critical question: If this is such a powerful strategy, why isn’t it standard practice for every business?

This guide answers that question from your perspective as a business owner, focusing on the practical realities of using an IFA as a corporate finance tool.

The High Cost of Trapped Capital

Infographic from Taxevity comparing Trapped Capital vs. Unlocked Capital. It shows how an IFA unlocks funds for growth and flexibility, which are otherwise tied up in insurance premiums.

The core problem an IFA solves is one of opportunity cost. A dollar of corporate savings used to pay an insurance premium is a dollar that cannot be used to:

  • Reinvest in the business for growth.
  • Pay down more expensive operational debt.
  • Seize a strategic acquisition opportunity.
  • Improve operational liquidity.

An IFA is fundamentally a capital efficiency strategy that allows your corporation to secure valuable permanent life insurance while retaining access to capital for these higher-returning activities.

Why an IFA Isn’t For Every Business

While powerful, an IFA is not a fit for every business. The reasons are rooted in the specific financial and strategic requirements of the strategy.

  • Reason for Insurance: The foundation of an IFA is a reason for permanent life insurance, such as funding a multi-million dollar buy-sell agreement or covering the eventual tax liability on the growth of the business.
  • Minimum Scale: The strategy is designed to address substantial financial goals. Lenders typically require annual premiums of at least $50,000 for 10 years, making the strategy suitable for businesses of a certain size and profitability.
  • Comfort with Corporate Leverage: The IFA strategy adds a loan to your balance sheet. While the loan is secured by the insurance cash surrender value and the interest may be tax-deductible, some business owners are fundamentally opposed to taking on any new corporate debt. In some cases, a portion of the premium itself may also be deductible as collateral insurance.
  • A Long-Term Strategic View: A business must be stable and have a long-term outlook to support a multi-decade financial strategy like an IFA. It may not be suitable for early-stage startups or businesses with unpredictable cash flow.
  • Need For A Coordinated Advisory Team: Executing an IFA requires a cohesive team. At Taxevity, we work with your accountant and other advisors to ensure the insurance structure is sound and meets your business objectives.

Addressing the Fine Print: A Look at Key Risks

A prudent business owner knows to examine the risks. Here are the key considerations we discuss with clients and their other advisors:

  • Lender & Loan Risk: The strategy involves a significant commercial loan. Even if you work with your existing bank, this formal arrangement has terms and conditions to be understood and managed. We can also make introductions to other major Canadian financial institutions that offer IFA programs.
  • Interest Rate Volatility: A sharp rise in interest rates can increase the cost of capital. The business’s financial plan must be robust enough to service the debt comfortably through various economic cycles. We model a higher-than-current loan rate in our projections to demonstrate this resilience.
  • Policy Performance: Projections are not guarantees. We build our plans on conservative assumptions, using a whole life dividend scale below the insurer’s current one to stress-test the plan’s performance.
  • The Exit Strategy: An IFA is structured to last for the life of the insured person(s). While an early exit is possible, it can be complex and costly from a tax perspective, particularly if the investments made with the loan proceeds are sold to repay the loan. This reality reinforces the need for a long-term commitment.

Making Your Capital Work Harder

A business’s capital is one of its hardest-working assets. For the right company, an IFA is a sophisticated tool to secure essential insurance while putting your capital to better use.

The best way to determine if an IFA is right for your business is to analyze the numbers. We prepare tailored projections, explain them and make revisions until you and your advisory team are comfortable making a decision. Whether you’re exploring this for the first time or want a second opinion on a proposal, we invite you to connect with us.