Best use of free working capital

[DDrake]

I submit my question to the many great minds here.

The situation:

I operate a business that I occasionally need large amounts of working capital to run my operations smoothly. Generally I like to keep around $150k available for the needs of my business and other short term investment opportunities that arise, with the primary reason being that when I am deploying this capital in my operations its generally very profitable.  Currently that cash sits in a spark savings account at 1%. I have attempted to get a LOC for my business and its proven to be very difficult to obtain at a reasonable rate and the amount that I need to have available.

So my idea was to pay off my house and get a LOC on the house to be used when I need the cash a net increase of about 2.5% between the mortgage rate and the interest rate on my savings account.  (does any one recommend a bank for a HELOC?)

My question:

Is there a better way to do this that I am missing?  Is there bank that is friendly to small business?  I have pondered investing this money, but Id prefer not to be subject to the volatility of the market as my business occasionally depends on this cash. Any way to invest this money

[matchewed]

I'm not certain mixing business money with HELOC is the way to go here. I'd either try to find what the business lines of credit hurdles are and work through those or keep utilizing the savings account. If the cash is so profitable when it is applied to the business then the liquidity is really the key factor. Unless you can leverage with the bank via the credit the savings is still your best bet IMO.

[sokoloff]

The problem with relying on a HELOC for sudden cash needs for your business as opposed to having your own cash sitting in a savings account is that in the event of a significant financial turmoil event, it wouldn't be unheard of for your HELOC to be frozen to new withdrawals. Same issue with revocable business lines of credit.

It would be far, far, far less likely for your savings account to be frozen (and in such a case, your business might not be your greatest concern).

In your situation, I'd probably prefer to keep the cash on hand, invested in a mix of short-term accounts (a 1% savings account is pretty good) and fund(s) of government backed securities of various durations (the mix to be determined by your threshold for losses in an increasing interest rate environment and the profile of how often you need 10% vs 25% vs 50% vs 99% of that cash for your business).

[DDrake]

Interesting indeed, I had not considered that a heloc could be froze. What conditions do you think would trigger the bank to reevaluate the line?

Dan

[sokoloff]

Interesting indeed, I had not considered that a heloc could be froze. What conditions do you think would trigger the bank to reevaluate the line?

This is by no means an exhaustive answer, but in the event of a housing crash or general financial meltdown (2001, 2008), there may be questions as to the value of your property and/or your financial standing/ability to repay the loan. It would seem only prudent for the bank to tighten up (even if temporarily) on new credit consumption in such a case.

That might also be the exact moment when you need money in the business, either for ongoing operations or to take advantage of the panic in the figurative streets. Not a good combo.

For a more extensive and authoritative answer, I'd check with your banker(s) or other business advisor(s). For me, a HELOC isn't the same as cash in savings.

[Dicey]

That money may not be earning much, but it isn't exactly doing nothing, either. When you need it, it's extremely valuable. Maybe reframe your expectations. You buy insurance that costs you money out of pocket, don't you? This cash is insurance that your business keeps flowing smoothly when you need it. That is an enviable position for most businesses.

In the event of a business downturn, when money is harder to get, you'll have a leg up on your competition. And you can feel smug as hell that you didn't chase returns.

As to helocs being frozen, I brought this up on another thread and people refused to believe it. Given that the evidence is a mere Google search away, I thought the naysaying was ridiculous. It happened to thousands of homeowners, through no fault of their own.

I am assuming that you have other funds invested in equities. Just keep adding to them like a badass mustachian and you'll be fine.