Tag Archives: #business owners

What Is Good Debt Versus Bad Debt

When talking to business owners about their financial situation, a key area I look at is the Balance Sheet under the Liabilities Section.  First, I see if it matches with what the loan statements show because if it’s not accurate then it’s not going to give any useful information to evaluate.  Second, I look at what types of debt they have, whether it’s vehicle loans, property loans, line of credit(s), or general loans that business owners use as a bridge to help in between the slow times with cash flow.

Vehicle Debt

If there’s a need to get something new every few years, then think about how much is going towards interest, let alone principal, and realize that they don’t increase in value EVER.  It’s estimated that a car loses 10% of its value as soon as you drive it off the lot and imagine if it’s involved in an accident which the insurance company says it needs to be totaled.  How much of this investment have you made that’s paid off?  Yes, you do need vehicles to conduct business, but in the end, you need to determine what you’re paying in the long-term.

Property Debt

Property debt isn’t always good debt, especially if it’s just sitting there and not income producing.  It’s worthwhile to sit on and increase its value, but you also should verify if it’s keeping up with what you’re paying in interest on top of the principal.  Consider putting together a spreadsheet as to what you’re actually planning to spend from the cost plus interest, and then determine based upon prior year tax rolls if it actually is a worthwhile investment.  Realize that if it comes down to a situation to where you need to sell it for a cash infusion, is it something that you can refinance or do you just need to outright sell it, is it even possible.

Line of Credit

The purpose of a Line of Credit is that you draw down on it when you need it and then repay it back when you have the capability to.  Yes, they generally have lower in interest rates than a credit card which is a value in savings, but it’s also not the best option if you have money management issues because you end up maximizing it out.  It can definitely be a lifesaver because the limits are often higher than a credit card limit, but there’s always a bad side to every option.

General Business Loan

With numerous loan options out there, it’s never easy to get out-of-debt if you’re not careful.  A former client’s partner signed up for a loan, got cash the next day, and it helped purchase inventory items that they needed in order to start a new job.  Unfortunately, after running the numbers when I did their tax return, they ended up paying 48% in interest in 1 year for what it cost them in the end.  Now instead of advertising high interest rates because of government entities, they’ve skirted around the issue by simply calling these interest payments “administrative fees” to make things look above board.  Read the fine print, especially if you’re faced with a review of your financials by a bank loan officer or auditor, trying to figure out why you’re paying so much in interest because it makes them wonder if you’re a good credit risk or if they could even be legitimately deductible.

Dwayne J. Briscoe

Working During Limited Cash Flow

All start-up businesses, as well as well-established businesses, deal with limited cash flow at one time or another, and a lot of times there’s no way of being able to prepare ahead of time for it unless you have some set boundaries when you’re trying to figure out how to get through the rough spots without failing altogether.

  1. One of the biggest fails business owners feel is that they need to spend money in order to make money, but unfortunately a lot of times that’s not always the case. Often there’s no guarantee that this idea will work and then you’re often in a deeper hole than when you first started.

As an example, I was personally exploring an ad-based review service that used pay-per-click advertisement rates, and while the sales rep was demonstrating the site to me, they told me that as soon as I put in my credit card information to make a commitment, they would give me a discount code.  When I refused and explained I first needed to determine how much of a financial commitment I could make for advertisement, as well as exploring what other companies were doing and if my market audience was who I would target, they persisted until I finally hung up.  I don’t fault them for their drive, but it needs to be beneficial to my needs and not just how much they can collect.

  1. When was the last time you had an idea as to what your business loan(s) status was and if the possibility of renegotiation was available? I’ve personally worked with numerous clients who felt that they needed to take what was offered to them and should just leave well enough alone.  Or another reason is that they didn’t want to seem needy or desperate, so they would just find other, more risky alternatives.

A former client took out a loan once and when I calculated the loan’s interest, it was a whopping 48% they ended up paying.  Why did they get something to what seemed so ridiculous?  They thought that they needed it to get through a rough time they saw in the future, but that situation never happened and were locked into paying a lot of unnecessary monies when it could have gone to something more profitable.

  1. Where does loyalty lie when it comes to making sure your business survives? If you owe vendors, work with them and not just go silent hoping they’ll ignore you.  Work with your bank loan officer and keep them posted as to if you need some potential breathing room to help make ends meet.  And above all else, remember that relationships are your bread and butter so if you need to look at firing “the pretty one” because they’re costing you more than what they’re bringing in, then you need to do it.  You worked too long and too hard in order to not put your business’ needs first.

As business owners, we rarely have a day off to just breathe, because if you just expected to work 9-5, then it’s a matter of working for someone else then.  Because we work to have the flexibility and freedom to accomplish greater things, that takes sacrifice.  There’s always going to be lean days, which is what makes us appreciate the better ones.

Dwayne J. Briscoe