O.P.M. which is defined as “other people’s money” remains an old and often desired source of funds. Venture Capital can come to a business owner in many forms. Personal contacts, wealthy investors, hedge funds, banks and speculators are just a few of today’s potential providers of private equity. Projects that are deemed too risky for traditional avenues of money lust after such deals. No matter the source, one thing is certain, Venture Capital is not cheap and comes with strings attached.

Angelic investors are not real. Entrepreneurs, who wish to expand into new marketplaces, compete overseas or simply add new real estate to their portfolios, need to be keenly aware of the would-be downside to Venture Capital. You will now have a new business partner and they are rarely silent. In order to avoid loss of control, many businesses are looking for other solutions such as captive bank ownership. Captive Bank Ownership (CBO) enables the parent company to raise their own Venture Capital and circumvent possible disasters. It need not be complicated but does require engaging third parties with expertise and the ability to post reserve funds.

Captive banks can be owned either domestically or offshore. Most frequently, the charter is located overseas where CBO is better understood. This enables the parent company to reduce reserve requirements and leverage their time by “offshoreing” administration. In a strange twist, CBO has gained a direct benefit in the post 9-11 business environment with increased international banking regulation.

Accurate or not, the stigma once associated with private offshore banks has dramatically changed for the better. Cross-border cooperation and detailed background checks have made ownership harder to obtain.

As such, it has become more valuable. After all, what is more prestigious and can open more doors, a degree from Harvard or your local community college? Once CBO is obtained it is by definition a tool for raising capital. Methods for pooling funds and raising assets are too numerous to list here. Implementation, however, of a quality business plan and fiduciary guidance will be essential for success.

Finally there are four very important keys to keep in mind.

  1. CBO is NOT a tax shelter. Don’t even try it. You will get caught.
  2. A quality return for both principal and interest will be expected. Just because you have maintained control of your business by eliminating the middle man does not mean fiduciary obligations can be dismissed.
  3. This is not a quick fix. CBO can take months or even years to accomplish. Patience is a virtue.
  4. CBO in one country is not a ticket to circumvent the banking laws of others. Use good business sense and prosper from ownership.

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