Have you considered borrowing the maximum amount of money allowed from a bank or financial institution? Well, let me put this politely: Don’t. For a number of reasons, I would always borrow the minimum amount, and here is why.
Recently, I advised a business buying a commercial property to put down as much cash as possible. To my dismay, they did not agree, preferring to hold their cash and borrow as much as possible. Was this not a strange decision? Imagine it was you who had $1 million in cash and wanted to buy a $1.5 million property. What would you do? Look at this equation.
The cash you hold may be earning about 1 percent net (after tax deductions) from bank interest. If you put down $500,000 and borrow $1 million you will pay, let’s say, 5 percent interest. Essentially, you are borrowing your own money and paying an extra 4 percent to use it? Does this make sense?
In addition, your cash flow is committed before you get any of it.
Now imagine if your business has a downturn and cash income is lower than anticipated. No doubt, this will cause difficulty in making the repayments. And what will be the result from such delinquency?
Pressure from the lender, possible penalties for late payment, or worse, being forced to sell the property as the lender wants his money back.
[img]1430|left|Victor Green||no_popup[/img]If the worst happens, the lender will look to sale, which will allow him to reclaim his losses. With that, you would have paid for years and have nothing left to show for it. However, if you had put down the extra $500K, you would have the majority shareholding with a great opportunity to re-finance if needed. Also, your cash flow income would be significantly improved.
Don’t use the common excuse that if I borrow, I get a tax break on the interest. Yes, you will but only if you have profits to set them off against. Surely, this cannot be the best reason to borrow money and increase debt and reduce cash flow.
Mr. Green was born in London to a middle class family. He had two brothers, one older and one younger. His parents were not in business, average parents trying to do their best for their family. From a young age, Mr. Green had an old head on young shoulders; he often said he must have been 40 when he was born. For an unknown reason, he had a thirst and loads of energy to learn, not at school, but about business matters and about how he could make money. He always wanted to know how business worked, how to do everything himself. This, in later years, became of great value. He was able to assess things quickly and with his firsthand knowledge knew what needed to be done in business situations. Because of this, he could spot opportunities quickly and move faster than many others. Mr. Green had business smarts and the ability to make quick decisions. His energy and inquisitive nature made him look at many business opportunities, some of which he tried before he eventually became his own boss. Ideas such as: opening a deli, importing cuff links from the USA, silk ties from Italy, importing Sangria from Spain. His first fulltime business venture was starting a publishing company. From this he went on to start numerous other businesses, such as organizing conventions, printing, advertising, direct mail, public relations, photography, import and export, manufacturing, soccer clubs, website design, creating portal websites, real estate, finance company, business consulting. The recent author of “How to Succeed in Business by Really Trying,” Mr. Green may be contacted at http://www.howtosucceedinbusiness.com/
