Managing Inconsistent Agency Cash Flows via Margin Accounts

Nov. 11, 2022, 7:38 a.m.

Banks are conservative. They don’t loan money to businesses that need money, they loan money to businesses that don’t money. This doesn’t help if you are an agency where companies pay you in whatever timeframe they want even if you say NET-15. An agency likely also has a hard time raising money since it is a services business as opposed to a product business so venture funding doesn’t really exist.

So I’ve had to figure out how to minimize unproductive cash while being able to have access to cash readily when I need it. The simplest solution I found is to have a brokerage with a margin account with a low margin rate. I use Interactive Broker (#aff).

The idea is simple, there should be as little money in the business bank account as possible. If you are a LLC you want to minimize the liability that you are responsible for if you get sued. Second, you want to ensure that you are not holding as much cash especially in a high inflation environment like right now.

What I have done is the following:

  1. Keep a minimum amount of cash on hand to pay bills, and a little extra for emergencies in the bank account.
  2. Move all cash into a Brokerage that is dedicated to the business. This should be a personal account as this won’t get possessed if you get sued.
  3. Invest based on your risk tolerance, with an idea of minimizing the risk so you can access that cash in the future.
  4. When money is needed by the business, take a margin loan against your brokerage account to pay for what the business needs. I leverage up to 25% of the portfolio, but I suppose I have a higher risk tolerance. This way you are not incurring capital gains taxes on your investments.
  5. Refill the brokerage when cash comes in to pay off the margin loan and continue buying more assets.

The benefits has been I can have access cash on a low rate versus a bank loan and don’t have to deal with a bank at all. Second, the brokerage account continues to grow giving me an even cheaper margin rate.

The risk is of course an increase in interest rates, but say you have a bunch of S&P500 ETFs, on average they grow at 15% year over year. Even if the margin interest rate is 5% you are still up 10% on average.

(This is not investment advice, you should do your own research.)