Is it Better to Pay Off Loans Or to Invest?

What to do with your money is always a temptation. Is it better to pay off loans or to invest your extra cash is often the question whenever a person comes into extra income. It is hard to sit on the sidelines and watch others take advantage of low stock market and real estate prices while you plug along slowly chipping away at your own mountain of debt.

The goal of becoming debt free is admirable. Just think of the opportunities you would have for investments if you did not have to sink most of your available cash into old debts. You probably wonder every month whether it is better to pay off loans or to invest any extra cash you have earned.

Here is the quandary that arises when you try to balance reasonable actions with the dreams of getting rich through investments. The thing holding you back are old debts. You must use today’s money to pay off things you may no longer even have, like all those expensive dinners out or clothes that are now out of fashion.

Most financial advisors would tell you that the answer to the question of whether it is better to pay off loans or to invest is to pay off loans and old debt as fast as you can. There are fast plans to reduce debt, and best-selling books on the subject of debt freedom are everywhere. The main point to paying off old debts, besides meeting your legal obligations, is that once you are fully paid off on those debts, your money will be all yours. You can do with it whatever you want, rather than paying your future income to others. If you have loans, you have promised future income to others, like the bank.

Most of the debt free program advisors will tell you that you need to clear the deck of loans and other bills prior to even thinking of investing. But here comes the rub. A good part of investing is timing. If you miss the big opportunity to get in on the investment before it moves upward, you miss the big chance to make money on that investment. No one wants to get in at the top, they want in at the bottom to make the investment profitable.

Recent economic hard times and the stock market downturn may cause some people to rejoice that they had decided to pay on debts instead of investing while the investments were turning downward. They are ahead of the game and will be ready to jump on board when the investment train goes back uphill again as it always does.

In bad times, it is better to pay off loans than to invest. Keep an eye on investments, and do research so that when you are loan free you have money saved and ready to invest and know where you want to invest it. Live life on a cash basis and never get caught in the loan/debt trap again.

The Small Business Financing Crisis

The current small business credit crunch is getting much attention and rightly so. We know very little about the overall small business universe because it is so huge and diverse. Most discussions about this topic focus on credit and lending, but the issue is much more complex than that. A more broad-based discussion is necessary to understand the full extent of the current crisis. The crisis encompasses both types of financing, debt and equity.

Personal Wealth

In good times or bad the top source of small business capital is the personal wealth of the owner. Even beyond startup, owners often tap into their personal wealth like a line of credit, on an ongoing basis. If available, personal wealth is easier to access than other forms of financing and may be the only source available. The primary sources of personal wealth are typically real estate and retirement accounts. Since 2008 both of these sources have taken a huge hit, so the amount of personal wealth available has plummeted. Most owners are experiencing the worst economic times in their lifetime. So even if they have personal wealth available, they are less likely to invest it in their businesses. Instead, they are cutting back or forgoing expansion.

Friends & Family

Another common source of capital has essentially dried up – friends and family. For the reasons discussed above, friends and family have less wealth available and are less willing to invest.

Creditworthiness

The ability of a private company to borrow funds depends on the cash flow of the company, the available collateral, and the credit of the owners. Most small business revenue, profits and cash flows are down substantially. The value of available collateral, often including the personal residence of the owners, has also dropped significantly. The compensation of the owners is often based on profits, so it is down, too. With both personal income and wealth declining, the credit score of the owners has likely declined as well. All of these factors, in combination, result in less creditworthy private companies.

Credit Cards

Another common source of capital is using credit cards typically based on the personal credit of the owner. Credit card companies have tightened credit standards for getting new or increasing existing credit lines. In many cases they have actually reduced existing credit limits. As discussed above, the creditworthiness of both the owners and the company has declined. The result is that credit card financing is less available and tougher to get.

Bank Financing

Many banks have funds available and seem willing to increase small business lending, but have other issues preventing them from doing so. The demand for business loans has decreased because many companies are cutting back or forgoing expansion. As discussed above, there are fewer creditworthy companies. Many banks are facing increased pressure from regulators to reduce risk while experiencing difficulties with some of their commercial real estate loans. Although small business loans can be very profitable, they are very risky. Many small banks are more familiar with other types of loans and may have little experience dealing with Small Business Administration (SBA) loan programs. Continuing issues with the funding of SBA programs has created some doubt about the availability of loan guarantees. Again, the result is bank financing is less available and tougher to get.

Conclusion

All of these issues create a complex small business financing crisis that requires broad-based solutions. A vigorous and sustained economic recovery would alleviate many of the issues, but many expect small business to lead us out of the recession. How is that supposed to work? We need better ways to finance small businesses. Ones that will enable institutional and individual investors to invest in small, private companies like they currently do in large, public companies. The expansion and increased visibility of the secondary market for SBA guaranteed loans is a small step in the right direction that will hopefully lead to a more comprehensive solution.

How To Deal With Your Small Business Finance Needs

One of the most challenging and time-consuming tasks for any business owner is to finance even a small business. While it is considered an essential part of running and expanding a business, it should be done properly and carefully so that it won’t hinder the establishment of the business as a whole. Small business finance is basically the connection between cash, value, and risk. Maintaining the balance of these three factors will ensure the good financial health of your business.

The first step that a business owner needs to take is to come up with a business plan as well as a loan system which comes with a well structured strategic plan. Doing this will certainly result to concrete and sound finances. It is of necessity that prior to your financing a business, you figure out what exactly your needs are in terms of small business finance.

In trying to determine your business’ financing requirements, keep in mind that you have to have a positive mindset. As the owner of the business, you should be confident enough in your own business that you will be willing to invest as much as 10% of your small business finance needs from your own pocket. The other 30% of the financing can be from venture capital or other private investors.

In terms of the private equity aspect of your business, you would want it to be around 30 to 40 percent equity share in your company for a period of at least three years and a maximum of five years. But of course, this will still be dependent on the value of your small business along with the risk involved. Maintaining this equity component in your company will assure you majority ownership of the business. As a result, you will be able to leverage the other 60 percent of your small business finance needs.

It will also be easier to satisfy the remaining financing needs of your growing business. You may opt to get the rest from a long-term debt, inventory finance, short-term working capital, and equipment finance. Remember also that as long as you have a steady cash position in the business, many financial institutions will be more than willing to lend you money. In this respect also, it is recommended that you get an expert commercial loan broker who will do the selection of your financing options. This is also a crucial stage as you would want to find the most appropriate financing offer to meet all your small business finance requirements.

These are just some of the important considerations that need to be taken when financing a small business. There are, however, so many business owners who do not pay enough attention to these things unless their business is in crisis. As a business owner, what you should keep in mind always is how you can grow and expand. Therefore, have a small business finance plan as early as possible so that you can make sure that every financial aspect of your business is in good condition.