Why do you need to borrow money?
- 08.19.09
- Entrepreneurship, Finance Concepts, Investments, Business, finance, invest
Well, aside from the obvious reason that you need it, whether for capital or other expenses; borrowing money can help you to manage your finances if you know how to leverage debt. That is to know the difference between good debt vs. bad debt.
In this article, I will expound more on the idea of debt leveraging by using other people’s money instead of yours. Good debt makes the rich gets richer. There are very few entrepreneurs who did not borrow money to grow their business.
If you can generate for example, in your business, an income which is more than what you need for interest payment, it would be wise to borrow money to start a business. This will give you a higher return on your initial personal investment. How so?
Scenario 1: Without borrowing money, for example, a business needs P100,000 capital and has a return or net income of P20,000 in one year. If you invested all your money in that business, your return will be 20%.
Scenario 2: However, if you borrowed P90,000 instead and used only P10,000 of your own money and paid 15% interest on the money borrowed (equivalent to P13,500), that leaves you with a net income of P6,500 (P20,000 net income less P13,500 interest expenses). That P6,500 is a return of 65% on your P10,000 investment. So definitely, you had a higher return than the first scenario that only gave you 20%.
If you can borrow, do so and just keep your savings for emergencies or for additional working capital later on.
However, make sure you pay back on time what you borrowed and as agreed upon (i.e. comply with the interest rate and other terms). You will never know when you need to borrow again from the same person or institution. A bad payment record gives you a bad reputation (it spreads like a wildfire) and excludes you for a chance to borrow again.
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reyjr
this is prudent advise tyrone.
still, borrowing money is a risk, if your investment does not produce it’s expected return, then you pay for the interest and capital yourself, as opposed to just losing the money yourself.
then again, risk big, win big right? personally to me, this is all still theoretical. i’m still looking for the right opportunity to try it out. hehe. any suggestions?
[Reply]
Tyrone
I agree reyjr. After all, life is full of risks and uncertainties. But there is a term “calculated risk”. We can minimize risk. In order to do that, we must educate more ourselves before we plunge into a certain business or investment. Educating ourselves lessens our fear of losing the money we are risking.
[Reply]
Bellar
To make our business becoming larger fast, the most common is by borrowing money from bank/financial companies. I think it should be done as long the debt is a leverage debt, used to productive things (make money more money) for our prospective business. Usually the result is much better compared with biz man who conventionally use their own money.
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Anyway, in my view - several factors shall be taken into consideration :
- We have to make sure ourselves that the business has good prospect (personal confidence).
- maintain low level debt service ratio (all debt / all net revenue before obligation), ideally < 30%.
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By those two rules, it’s quite safe to take some credit facility.
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Chris | Crisiboy.Com
bro attend ka ba wordcamp???kitakits tyo dun..kaso di pa ko nagbabayad eh..hehehe
[Reply]
livingstain
AY PARANG NAALALA KO YUNG SUBJECT NAMIN NUNG COLLAGE SA MONEY CREDIT AND BANKING… TSAKA TVM.
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elmot l PinoySoundingBoard
good point bro, esp on the bad and good debt.
hey, ano nga pala, ask ni chris if you will attend the wordcamp?
@chris: magkano ba bayad?
[Reply]
Kevin Quinlan
I agree that using other people’s money to create wealth is a great idea but on the same note most succesful startups fail a few times before actually finding a business that works. This means expect to lose money on your first few businesses and go into debt. Therefore borrow but don’t go overboard especially if you are new to the idea.
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Irej
For me i don’t want to borrow money as capital for a certain business.. kasi yung interest malaki laki rin.. lalo na sa Bumbay.. 5-6… ganun din sa mga nagkukunwaring bumbay 10%.
I rather to choose small business, yung katamataman lang yung fit sa badjet. at least walang iniisip na babayaran, walang sakit sa ulo.. higit sa lahat, makakatulog ng mahimbing.
Napadaan lang Mr. Millionaire.
[Reply]
marvin
good point on OPM - other people’s money!
hi tyrone! im lurking on your site and im loving ur posts/articles. id be hanging around here more often as im fascinated with ur sound financial advise.
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mrsweetsnowcones
nice posting again…as 50 CENT has stated in one of his songs that “GET RICH OR DIE TRYING”..
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crazy blogger
good post on good debt vs bad debt
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Elevic Pernis
The irony I see is that as you become richer, the more you become proficient with using Other People’s Money. Starter’s like me must settle with saving, own equity, learning. After some profits later and some experience, I can really use OPM and my banker would be glad.
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