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*** DEBT IN A BUSINESS ***
Personal debt, particularly expensive unsecured debt (credit cards rather than a mortgage) is never a good thing.
There are a host of fantastic accounts that give great tips on getting debt-free:
Personal debt, particularly expensive unsecured debt (credit cards rather than a mortgage) is never a good thing.
There are a host of fantastic accounts that give great tips on getting debt-free:
Debt-free goal? Follow them:
@BWPFinance
@FiSavvyDad
@CWDebtRelief
@OddHacks
@DebtsToRiches
@KalebFirkins
@wealthyhealthyl
@SenseofDollars
@SteveOnSpeed
@Lion_Investor
@DecadeInvestor
@MacroTrendline
@justinekedi
@JDRostagno
@betty_bootstrap
@FortitudeFinanc
@BWPFinance
@FiSavvyDad
@CWDebtRelief
@OddHacks
@DebtsToRiches
@KalebFirkins
@wealthyhealthyl
@SenseofDollars
@SteveOnSpeed
@Lion_Investor
@DecadeInvestor
@MacroTrendline
@justinekedi
@JDRostagno
@betty_bootstrap
@FortitudeFinanc
Personal debt that is used to pay for consumption (clothes, food, holidays), not assets (house) is never a good idea.
But, not all debt is bad!
Debt within a business can be an excellent thing*
*with caveats
But, not all debt is bad!
Debt within a business can be an excellent thing*
*with caveats
Benefits of debt within a business:
1. Leverage
2. Tax-deductible
3. Cash injection
4. No ownership dilution
1. Leverage
2. Tax-deductible
3. Cash injection
4. No ownership dilution
1. Leverage
As an owner, I can inject equity capital into the business - let's say $100k.
If my business makes $25k in profits, my "Return on Equity" is:
ROE = $25k/$100k = 25%
As an owner, I can inject equity capital into the business - let's say $100k.
If my business makes $25k in profits, my "Return on Equity" is:
ROE = $25k/$100k = 25%
Instead of injecting $100k, I inject $50k and borrow $50k from the bank.
My business makes lower profits because I have to pay interest expense, for example, $20k instead of $25k.
What's my ROE?
ROE = $20k/$50k = 40%
The debt has leveraged the return on my equity.
My business makes lower profits because I have to pay interest expense, for example, $20k instead of $25k.
What's my ROE?
ROE = $20k/$50k = 40%
The debt has leveraged the return on my equity.
2. Tax-deductible
Debt is never free, there is an interest expense or cost of borrowing to be paid.
However, interest expense is tax-deductible.
This means that because my business has an extra (increased) legitimate business expense, my profits before I pay tax are lower.
Debt is never free, there is an interest expense or cost of borrowing to be paid.
However, interest expense is tax-deductible.
This means that because my business has an extra (increased) legitimate business expense, my profits before I pay tax are lower.
If my profits before I pay tax are lower, then I pay less tax.
The interest expense has "shielded" my business from some tax expense.
This means the actual cost of the borrowing is lowered by this tax saving amount.
The interest expense has "shielded" my business from some tax expense.
This means the actual cost of the borrowing is lowered by this tax saving amount.
3. Cash injection
Cash is like oxygen for a business. It is really hard for a business to grow with no cash.
Taking out business debt injects cash into the business which often unlocks many growth opportunities.
Cash is like oxygen for a business. It is really hard for a business to grow with no cash.
Taking out business debt injects cash into the business which often unlocks many growth opportunities.
4. No ownership dilution
Many entrepreneurs, when raising investor capital, worry about "giving away" their ownership stake.
If the business raises capital through debt rather than equity, the ownership of the founder is not diluted.
Many entrepreneurs, when raising investor capital, worry about "giving away" their ownership stake.
If the business raises capital through debt rather than equity, the ownership of the founder is not diluted.
THE CAVEATS
Leverage can work in the opposite direction - accelerating ROE down not just up!
Interest expense can be a huge cash flow drain.
The lender might not be an owner, but they will be keeping a very close eye on you!
Leverage can work in the opposite direction - accelerating ROE down not just up!
Interest expense can be a huge cash flow drain.
The lender might not be an owner, but they will be keeping a very close eye on you!
Debt within a business is great provided that:
You have a clear plan of how the cash injection is going to enable growth which will, in turn, allow you to service the debt.
Servicing the debt means plenty of cash flow to pay the interest expense + the ability to repay the loan.
You have a clear plan of how the cash injection is going to enable growth which will, in turn, allow you to service the debt.
Servicing the debt means plenty of cash flow to pay the interest expense + the ability to repay the loan.
