Content: Page 51, Becoming Your Own Banker Fifth Edition
Up to this point in the course we have been working to establish the principles of the Infinite Banking Concept, and then looking at an example of how they work for personal use. Now, let’s look at a business use of the concept and examine the truly infinite possibilities when you put your imagination to work.
Turn to Page 55 and study FIGURE 2. On the left side of the “Great Wall of China” is the flow chart of what’s happening in a life insurance contract. On the right side of the “Great Wall” is the information that we will be studying in the next several lessons.
The business we will be studying is that of a logging contractor in the Southeast U. S. To run his business, he needs four Peterbilt trucks, two logging tractors and one tree-shear. All this equipment is financed through a finance company that gets its money to lend from insurance companies. These companies simply buy large blocks of money from them and retail that money to businesses that are on the right side of the “Great Wall.” I refer to the finance company as a “Gate-keeper & Toll-taker.”
His total monthly payment for all this equipment is $16,000 per month.
The cheapest equipment item that he has is trucks. The logging tractors cost twice as much as the trucks – and the tree-shear is even more expensive than that.
Now, turn to page 56 where you will find EXHIBIT 1 which is a copy of a finance contract for one of his Peterbilt trucks. Notice that this was bought in 1984 for a price of $65,790 and that it was new.
In line 2, note that he paid $13,190 down and financed $52,600 (line3).
Skip down to line 10 and you will see that he must pay the finance company $1502.00 per month for 48 months to retire the debt.
Item 6 reiterates the amount that he financed ($52,600). Line 7 is the amount of interest he must pay over the period ($19,496). And line 8 is the sum of the two ($72,096).
The finance company made nearly $20,000 in interest over the time period. Do you think the Peterbilt Company made that much money from producing this truck? Do you think the truck dealership made that much money selling the truck? Do you think the salesperson at the dealership made that much money on it? Do you think all three of them made $20,000 from this sale? Absolutely not!! The “character in the play” that made the most money was the finance company. Business magazines have shown that Ford Motor Credit makes more money for the company than any other division. Do you see “The Golden Rule”– those who have the gold make the rules – at work here?
Search the page diligently and you will find that the Annual Percentage Rate for this loan is not to be found. This is a commercial loan and it is not required to be listed. I think the rationale goes something like this: “If a businessman can’t figure interest rates, he has no business being in business!” A financial calculator will show that it is a bit over 15% APR.
But, remembering what we studied earlier in this course – the interest rate is not what is at issue here – it is the volume of interest compared with the amount of the payment each month. To find that out, all we have Use It or Lose It to do is divide the total interest (line 7 – $19,496) by the total payments (line 8 – $72,096). The answer is 27% — every time he makes $1.00 in payments, 27 cents is interest!!
All this is predicated on paying the entire schedule for 48 months. If he trades the truck in at the end of 36 months the amount of interest per payment is worse. And if he should trade it in 24 months the ratio really becomes nasty!!
Furthermore, consider what happens at the end of the 48-month repayment schedule – his truck has 400,000 miles on the odometer, and he is back at the Peterbilt dealership negotiating a trade-in package with them. This time they allow him $18,000 (line 2) for his old truck – but the price of the new one has gone up, too!! The net effect is that he keeps financing about $52,600 every time he replaces a truck. This is a perpetual cycle for him and for every other person in such a business.
We will look at ways to improve his situation in the next lesson.
His accountant tells him, “Look how you are accumulating equity in your equipment!” That’s true, but he should have all of his equity in the banking business that finances his equipment. We will look at that possibility in the next lesson.