Investing

Borrowing to Invest - Employee Ownership

  • Last Updated:
  • Feb 1st, 2020 9:43 pm
[OP]
Newbie
Dec 17, 2019
3 posts
1 upvote

Borrowing to Invest - Employee Ownership

I'm looking at different options for investing in an employee ownership program. There are a number of benefits to ownership beyond the dividends so I'm not looking for advice on whether I should borrow to invest, but rather how best to do it.

1. I understand most people use a heloc for this purpose because the interest rate is low and they can deduct the interest paid on their taxes. I have some, but not enough equity in the house for the amount I need. I also have some cash that I can use, or put the cash on the mortgage so that I have more available on my HELOC.
2. I assume that using an unsecured LOC would be the same, except with much higher interest rates.
3. I could borrow money from my parents, or my parents HELOC, but would probably not be able to deduct the interest?

Is there anything I'm missing/ not considering?
9 replies
Sr. Member
Jun 28, 2018
854 posts
590 upvotes
Toronto
Hmmmm does your employee share plan allow for external funding to acquire shares?

I think at least in my experience they pull it from your pay and you can't deposit funds.

You can use many different sources of lending. Just which is most economical and accessible.

Line of credit, heloc are pretty flexible, which you already mentioned.

Some use special 0% interest credit cards with balance transfers. I don't know is the transfer fee is tax deducible.

Bank personal loan.

Pay day lender/Pawn shop.
The Distracted Investor

Dividends through quality companies 😃 Though I usually lose money with trades :facepalm:
Sr. Member
Aug 7, 2014
563 posts
235 upvotes
EngGal19 wrote: I'm looking at different options for investing...
3. I could borrow money from my parents, or my parents HELOC, but would probably not be able to deduct the interest?

Is there anything I'm missing...?
The interest on borrowed money from your parents or your parents' HELOC would be deductible for tax purposes, because interest deductibility is based on your use of funds (to earn taxable income), not based on where the funds came from.
[OP]
Newbie
Dec 17, 2019
3 posts
1 upvote
This National Bank offer for engineers includes an unsecured LOC with an interest rate of P+0.25%. Do any other banks offer similar? That rate is lower than my HELOC.
Deal Expert
User avatar
Aug 2, 2010
15193 posts
4924 upvotes
Here 'n There
Why would you wanna put so many eggs in one basket?
[OP]
Newbie
Dec 17, 2019
3 posts
1 upvote
eonibm wrote: Why would you wanna put so many eggs in one basket?
What are you talking about? I don't think I have said how many "eggs" this involves, or how many other "baskets" there are. But thank you so much for your incredibly helpful insight Winking Face
Jr. Member
Jun 17, 2018
118 posts
92 upvotes
Hamilton, Bermuda
EngGal19 wrote: What are you talking about? I don't think I have said how many "eggs" this involves, or how many other "baskets" there are. But thank you so much for your incredibly helpful insight Winking Face
He means that your financial wealth might become very dependent upon your employer's success.
Imagine the business turns sour, you lose your job and the stock plummets. Your plan is to borrow to invest in your employer's stock. He's just pointing out the fact that your financial well being will be increasingly tied to your employer's success, a situation most people should seek to avoid.
Newbie
May 23, 2011
78 posts
105 upvotes
gparadis01 wrote: He means that your financial wealth might become very dependent upon your employer's success.
Imagine the business turns sour, you lose your job and the stock plummets. Your plan is to borrow to invest in your employer's stock. He's just pointing out the fact that your financial well being will be increasingly tied to your employer's success, a situation most people should seek to avoid.
I second this. No need to get so defensive. The only reason an employee share program makes sense is cause they give you a discount or if the company you work for is rock solid recession proof.

I mean for instance, You’re pretty safe at purchasing employee TD shares if you work there. But I work for a manufacturer and I would not purchase our shares even at a discount. If we go bust, I’d lose my job plus my investments. There’s only a negative correlation. It’s not as if the company does well my salary will go up or if I do really well my shares will go up. But there’s a good chance if the company and shares suffer than my salary or job security will be threatened.

Also seems to me if you’ve got a mortgage and not much equity in it, most of your ‘eggs’ are in your house. Don’t buy at REITs cause that’ll over expose you to the housing market.
Newbie
Dec 21, 2019
2 posts
2 upvotes
I can only speak from my experience with a mid sized manufacturing company over the past 20 years that had multiple minority share offerings, and was ultimately sold by the original partnership to a private equity firm. When share offerings came, the company had already set up dividend reinvestment plans with their primary lender. So those that invested were not out of pocket, and the dividends paid for the shares quite quickly. On top of the dividends, those that got in early saw capital appreciation through stock splits and increased share price.
If not a publicly traded company, keep in mind the valuation of shares will be set by ownership and the shares will not be liquid. Review the shareholder agreement with a lawyer as well as the company financials. Also, non compete agrements are much more enforceable on shareholders vs regular employees should you leave the company.

In general, I agree with those above cautioning against tieing your financial wellbeing to one company. Suggested reading - The Wealthy Barber.

Unless this is a small business, and you are becoming a partner with some control of the future of the business, stay away from leveraging our house. The risk vs reward is too great. Also do not ask your parents to leverage their house for your investment. That is just crazy.

The last words of advice have to do with when the day came that the original partners in the company I worked for cashed out and sold controlling interest to an equity investment firm. The minority shareholders the sold out at that time made out like bandits. Those that held on based on the promises of exponential growth lost it all when the equity investor ceased dividends, gutted the company, and drove it into bankruptcy over the course of the next 5 years making the shares worthless.
Deal Fanatic
Apr 5, 2016
5036 posts
3569 upvotes
Calgary/Vancouver
Is your company a big one or well known? Some lenders can hold your securities as collateral and offer a loan for cheap like prime.

Example would be PCL Construction. It's an employee owned business where once a year, it's employees are offered a chance to buy shares of the company. You can borrow a demand loan with the shares as collateral. Rate is prime and the terms are highly flexible. You can go as long as 10 years and only have to pay once a year.
Current Fido and Rogers customer.
Ex Koodo customer.

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