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Tip 12. The Power of O.P.M. - Discover 3 Strategies That Show You How To Use Other People's Money Without Giving Away The Farm.

It's not unusual for your business to need to borrow money. In fact, a certain level of debt can be a good thing.

When looking for extra funds you have three options:

  1. Banks or other lenders (including creditors)
  2. Investors
  3. Your own funds

Here are three strategies to help you harness the power of Other People's Money. Read and implement them as your Steps for Immediate Results.

Strategy 1: Use your own money last

From my experience successful business owners take advantage of the power of Other People's Money and use their own funds last. Let's look at the differences between each possible fund provider

Banks and other lenders

The cheapest source of finance is usually available from banks or other lending institutions. They have established borrowing processes and as such are usually the quickest source of finance. You can use this type of financing for long or short term needs.

Investors

Investors are the next expensive source of finance. Investors seek high returns and will charge you more interest than banks. You will also find the process of applying for funds to be more extensive. A problem with using investors is you may have to provide them with some ownership in your business. Not only do you pay interest, but you may also have to share the profits too. You would only use investor's money for long term projects.

Your own funds

As a business owner you probably have limited access to your own funds. If you only have $10,000 in the bank, once that's gone that's it. What do you do if you need some emergency cash? That's why you should use your own funds last.

It's a common strategy to reinvest your earnings back into your business in the form of new equipment, more employees or additional overhead. You can do this but be aware the more money you have in the business, the more risk you underwrite personally. The more risk you accept the higher your return should be.

Strategy 2: Know the difference between "good debt" and "bad debt"

There are two types of debt, "good debt" and "bad debt". Good debt is something that someone else pays off, bad debt is something you pay off.

Your business can have as much good debt as you need. Avoid bad debt like the plague.

How do you determine if a debt is good or bad?

Good debt earns you more money than you pay out. Bad debt takes away from your earning capacity.

The best example I can use is investment property.

Say you have the opportunity to buy an investment property for $33,000. It has rental income of $4,680 per year. You allow 30% to cover repairs and vacancies, leaving you with $3,276 of income.

Assume you can borrow money at 9% fixed for 25 years on this investment (monthly principal and interest repayments). Assuming you put down a deposit of 10%, your monthly repayments are $247.39 or $2,968.63 per year.

You make $307.37 ($3,276-$2,968.63) per year, so the debt is good debt.

Let's take another investment property.

This next property is in a better area so you receive more rent, now $5,400 per annum. It will cost $62,000 to buy it. Allowing for the same parameters as before, your yearly income will be $3,780 and your annual repayments $5,577.43.

This is bad debt because you need to fund the lost cash flow, in this case $1,797.43 per year.

If you only did things that made you money, then you would have more money.

If you're interested in finding out more about real estate, then see my real estate tips.

Strategy 3: Limit the amount of bad debt in your business

Make it a rule that no more than 10% of your total borrowings is bad debt

 

 




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