Funnily enough, I’ve had 2 clients in my career who have been lottery winners. One used his winnings to start a successful hospitality business, living the reality of the famous discussion many friends have after a couple of drinks “We should open a pub!”
The other was already a successful businessperson and the immediate reaction was to pour the money into the family trust, pay down debt and reduce the cashflow facility in the business so that the interest bill on the business and the trust was reduced significantly, taking the pressure off.
Why might you not want to do this? From a business perspective, the key reasons why you might retain or use borrowings instead of cash, even when it is readily available are as follows:
Cost of capital: Depending on the cost of borrowing (interest rates) and the expected return on investment, it may be more cost-effective for the business to borrow funds rather than use its own capital. If the return on investment is higher than the cost of borrowing, it can result in a positive financial outcome.
Leveraging capital: Borrowing allows a business to leverage its existing capital. By using borrowed funds, a business can invest in growth opportunities, such as expanding operations or acquiring new assets, without depleting its own resources. This can potentially lead to higher returns on investment.
Opportunity cost: Keeping all a business's capital tied up in the company may mean missing out on other profitable opportunities. By borrowing, the business can allocate its resources more efficiently and diversify its investments.
Timing and flexibility: Borrowing provides the flexibility to act quickly on business opportunities or respond to unexpected challenges. It can be more efficient than waiting for the business to generate enough capital internally, which could take a significant amount of time.
My client ended up using the lottery win to pay down personal debt on home loans for herself and her family and invested in expanding the business through acquisition of a related business in Melbourne in a debt/equity split. The reasoning behind this was a combination of risks and rewards taking into account the reasoning listed above.
Of course, its not just the lottery that can cause you to have a big windfall. You could get a one-off contract as part of your general business. You could receive an inheritance, company merger or share buyout, or you could just have a big win on the Melbourne Cup…..
And on that note, best of luck
