Why do you need to borrow money?
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.
To get articles, you can subscribe using your favorite RSS feed reader or have them delivered directly to your email address.
Bookmark This Page:
What To Read Next
Search for more:
August 19th, 2009 at 11:36 am
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]
August 19th, 2009 at 5:11 pm
[Reply]
August 19th, 2009 at 10:08 pm
-
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%.
-
By those two rules, it’s quite safe to take some credit facility.
[Reply]
August 19th, 2009 at 11:33 pm
[Reply]
August 20th, 2009 at 12:10 am
[Reply]
August 20th, 2009 at 12:28 am
hey, ano nga pala, ask ni chris if you will attend the wordcamp?
@chris: magkano ba bayad?
[Reply]
August 20th, 2009 at 7:11 am
[Reply]
August 20th, 2009 at 12:06 pm
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]
August 20th, 2009 at 7:43 pm
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.
[Reply]
August 23rd, 2009 at 9:43 pm
[Reply]
August 28th, 2009 at 8:09 am
[Reply]
August 29th, 2009 at 1:16 am
[Reply]