Your business and Debt

Use leverage. Borrow money so that you don’t have to use your own. Just get a credit card for emergencies. You can get credit for your business that won’t show on your personal credit report.
Have you ever heard any of these little quips and thought to yourself, yeah that’s a good idea. Well, if you’ve ever started a business then I’m sure you have. The truth of the matter is that it is stupid, and will do more harm than good in most cases.
Why is it bad to have a loan out to start a business? That is quite an easy question to answer.
When you get a loan from the bank, from a credit card, from a family member, or wherever, the loan brings with it a few tagalongs called interest, origination fees, late fees, and other penalties if you are late. The biggest tagalong is of course interest. The banks try to fool you with supposedly low interest rates but how low are they really. Let’s do a little math to find out what your business loan is really costing you.
Say you obtain a loan to start a construction company. You need tools and a truck. You can’t just have any truck, you need a new truck. So you go to the local dealer and you find a shiny new truck for $35,000.00 and it is perfect for your business. So you sign on the dotted line and let the money start rolling in, right?
So here’s how it breaks down:
• 72 month loan for a new truck,$300 per month payment,6% apr
• Total interest paid over the life of the loan is $10,798.89
• Total paid for the truck $45,798.89 over 6 years
Now let’s see what else you could have done with the $300 per month.
• Save for 5 months and find a truck for $1500 and pay cash. (yes it will be a beater but it will be paid for)
• 67 months left to invest the same $300.
• You invest $300 mo. @ 12% in a safe mutual fund
• You will have $25,045.00 in the bank.
• Leave it in the bank for another 5 years adding nothing and you’ll have $44,137.85
• Leave it for 30 years and keep paying the $300 per month instead of paying a truck payment and you’ll have $1,723,399.63.
Why did I put 30 years on there? Because most people will have car payments their whole life and not give it a second thought. But if you notice, just a car payment will cost you almost $2 million dollars, not just the $45,000 over 5 years because you will trade it in after 2 years and do it again!
Not to mention that’s that much harder you have to work each month. One more headache to deal with. So think of that will all the debt your business is carrying. What is it really costing you. Wouldn’t you be able to make more and work less if you were running debt free?

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