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debtfree
07-21-2015, 10:45 AM
I plan to expand my business. I have the personal capital to finance the growth, but I am not sure what the best options are.

The company is incorporated and has excellent credit. It has shown good profit since its inception.

Given the cost of a loan, would it be better to just pay for the expansion using my personal cash? Or, should I finance the expansion and pay interest? What are the advantages/disadvantages of each option?

It is a simple business, and I use an accountant for payroll and taxes, but I didn't want to consult him and look like a complete idiot. So, I'm reaching out in this forum (since y'all don't know me) for advice. And, anyway, he bills me for everything. I wouldn't be surprised if he billed me for ink if I borrowed his pen.

Freelancier
07-21-2015, 11:12 AM
Basically, it comes down to the cost of money. Let's say you can get a line of credit from the bank for 6% (you don't want a lump sum, just to pay the interest on the part of the credit line you draw and only while you haven't paid it back). Let's say with that loan, you can grow your business larger than the cost of the loan + some profit. Well, that's a good deal for everyone, because you're able to service the loan and grow the business and eventually you won't need the line of credit, so everyone is happy.

An alternative scenario is you get that loan, the business doesn't grow enough to service the loan and you end up putting your own cash into it to repay the loan. Well, ok, you learned a lesson, but you're not worse off than you are with the case of putting your own money into the business in the first place.

Ok, one more: you borrow the money, invest your money in a casino or the stock market (same difference), and your business tanks and your bets don't pay off and the bank wants their money back in a hurry, because the bank plays in the same casinos and lost there as well. So that's the scenario to avoid and you take great care to do that.

Final scenario: you put your own money in. Focus on how you get paid back plus a reasonable amount for interest (which you don't want to declare as "interest", but as "dividends", because dividends are taxed at a lower rate... that's where you'll want to talk to your accountant about how to structure this). What you lose doing this is the "opportunity cost" of putting that money to work elsewhere (a medium-risk security will return about 5-6% per year).

So you have to decide based on the potential scenarios you're comfortable with. And whether the bank is really even interested in your business or what they'll want to secure the line of credit.

tallen
07-21-2015, 12:41 PM
Return on Investment, that's what it is all about.

Can you invest your personal assets in some other investment that will pay a higher rate of return than the dividends you hope to be able to generate with your own business?

Are your personal assets invested in something that will pay you a higher rate of return than your business would pay on a line of credit?

If I were you and had money to invest, I would probably invest it in my own business before investing in someone else's business. Unless there is some other advantage to establishing a line of credit with your bank, for example to cement your credit record for sometime in the future when your business has needs that exceed your personal capabilities...

debtfree
07-21-2015, 01:32 PM
Final scenario: you put your own money in. Focus on how you get paid back plus a reasonable amount for interest (which you don't want to declare as "interest", but as "dividends", because dividends are taxed at a lower rate... that's where you'll want to talk to your accountant about how to structure this). What you lose doing this is the "opportunity cost" of putting that money to work elsewhere (a medium-risk security will return about 5-6% per year)


Return on Investment, that's what it is all about.

Can you invest your personal assets in some other investment that will pay a higher rate of return than the dividends you hope to be able to generate with your own business?

Are your personal assets invested in something that will pay you a higher rate of return than your business would pay on a line of credit?

If I were you and had money to invest, I would probably invest it in my own business before investing in someone else's business. Unless there is some other advantage to establishing a line of credit with your bank, for example to cement your credit record for sometime in the future when your business has needs that exceed your personal capabilities...

Great advice. I have owned this business since 2004, and it has shown nothing but growth. It also proved to be recession proof during "The Great Recession". I believe that I could easily and completely repay myself the entire amount of my investment within six months, so it looks like the best bet is to use my own money.

turboguy
07-21-2015, 01:43 PM
I am sort of a "it's nice to be debt free" guy. I have followed the theory that it is the return on investment that was the important thing mantra a few times in my life and usually ended up finding my self in hock enough that it was a burden. Sometimes once you start to borrow it is easy to just keep doing it. If you do decide to go with the line of credit it probably will cost you less than some of the figures quoted here. That is if you have good credit and use conventional sources such as your bank. I have a line of credit with my bank and the interest rate is around 3%. We do pay an annual fee to keep it open and right now have a zero balance on it.

I have always felt the advantage of being debt free is that if tough times do arrive you can survive better than if you have a lot of debt. Back when the housing market crashed our business dropped from 3 million to 1.3 million and we ended up losing $ 185,000 that year. We did have debt and that could easily have sunk us. Right now we have no debt at all and it is a very comforting feeling. I am thinking hard about expanding myself. We are really cramped and the expansion I would want to do will set me back at least $ 250,000. Right now I don't have that much in the bank and if we do expand we will just wait until we have the cash. I am hoping that will be next year.

If I were you I would just use my money and forget the loan. Even though you have a nice profit now if a slow time did happen you could slide through it much easier

Pita
07-21-2015, 01:50 PM
Not to pry, but I'm curious as to why you wouldn't ask this question of your accountant first? He or she is the professional you currently rely on when it comes to handling your money. You pay them for their service and advice.

While I agree with the other posts on this thread, the simple truth is we're just a bunch of strangers who may or may not know what we're talking about...

Freelancier
07-21-2015, 02:47 PM
I believe that I could easily and completely repay myself the entire amount of my investment within six months, so it looks like the best bet is to use my own money.If that's your timeframe, then "yes, use your own money." However, depending on your business, it might still be worthwhile to work with your bank to establish a line of credit that you never intend to use, just in case some day you do need it to smooth out your cash flow. It totally depends on the type of business you have and how you can manage your cash flow within the normal operations of your business, some people find it's a good idea, others never want to do it and figure out another way.

debtfree
07-21-2015, 06:24 PM
Not to pry, but I'm curious as to why you wouldn't ask this question of your accountant first? He or she is the professional you currently rely on when it comes to handling your money. You pay them for their service and advice.

While I agree with the other posts on this thread, the simple truth is we're just a bunch of strangers who may or may not know what we're talking about...

I think I was looking more for confirmation of what I thought would be the best approach, which was using my cash and remaining debt free.

billbenson
07-21-2015, 08:40 PM
I am sort of a "it's nice to be debt free" guy. I have followed the theory that it is the return on investment that was the important thing mantra a few times in my life and usually ended up finding my self in hock enough that it was a burden. Sometimes once you start to borrow it is easy to just keep doing it. If you do decide to go with the line of credit it probably will cost you less than some of the figures quoted here. That is if you have good credit and use conventional sources such as your bank. I have a line of credit with my bank and the interest rate is around 3%. We do pay an annual fee to keep it open and right now have a zero balance on it.

I have always felt the advantage of being debt free is that if tough times do arrive you can survive better than if you have a lot of debt. Back when the housing market crashed our business dropped from 3 million to 1.3 million and we ended up losing $ 185,000 that year. We did have debt and that could easily have sunk us. Right now we have no debt at all and it is a very comforting feeling. I am thinking hard about expanding myself. We are really cramped and the expansion I would want to do will set me back at least $ 250,000. Right now I don't have that much in the bank and if we do expand we will just wait until we have the cash. I am hoping that will be next year.

If I were you I would just use my money and forget the loan. Even though you have a nice profit now if a slow time did happen you could slide through it much easier

I'm in incredible debt. In my situation it was pretty much unavoidable. I also make a lot of money and have a good business, but hey, Ed McMahon filed for bankruptcy. It puts a lot of stress on you. While the ROI strategy makes a lot of sense on paper, look at yourself. Are you a good bookkeeper and accountant? If not, keep it to cash. If you are and have the time to manage it (don't forget that time has a lot to do with small business) go for the best ROI . If you aren't, like me, and can, keep it to cash.

nayteclix
07-31-2015, 04:39 PM
The question you ask is a very common one. Think of it this way; why does your business exist? The answer is; it exists to make YOU money, not so that you can dump money into it. Generally speaking (but not always) its best to utilize OPM (other people's money) for business financing, this preserves YOUR money for you and allows your business to grow which makes YOU more money. Now growth must exceed cost of capital, and you want to make sure that you are not using debt financing for risky ventures that may do more harm that good. So, generally if your expansion is a safe bet then I'd use as much OPM as I can and maximize my expansion within logical limits. This is why the SBA allows 90/10 financing on some projects. So that the owner only has to put in 10% of the project capital while the bank handles the rest. This gives you 100% of the growth while preserving all of your equity and only costs you the interest; which, if you have planed well, should be more than affordable.

veritasvisions
07-31-2015, 04:47 PM
My opinion is that debt when it comes to investments is NEVER a bad debt. You just have to execute and make it happen.