There’s an old saying about Noah that talks about the best time to build an ark—BEFORE it starts to rain. When should you buy an umbrella? When it is NOT raining! Keep it handy in your car; maybe a spare in your office. That is the same with borrowing money. Get it when you do not need it, not when you are desperate. As a businessperson, it’s also nice to have access to capital when opportunities present themselves. A sunny day for your family may be having the money available for an upcoming wedding or a dream trip.
When should you be looking for additional capital? Certainly not when you are struggling. Ever borrow from a credit card? You might say “No, I haven’t.” If you have ever paid just the minimum payment or less than the full balance on your statement, you are essentially borrowing from the credit card firm. Who sets the rate? The lender! Your collateral is your future earning capacity.
Why is the rate on your home mortgage so low? Your mortgage is usually among the lowest rates you can borrow money for. The lender requires you to put enough money down, that should they have to reclaim your home they want enough to protect themselves and sell the home for what is owed. They also have the home as collateral against the loan.
For a moment, think about how you are running your business:
Do you have documented processes in place? Can an important contributor to your success leave and you have another in the wings to take their place? How secure is the stream of income (inflow) for your business? If you are a public corporation, lots of regulators and auditors monitor the truth of your reporting. People go to jail for fibbing or stretching the truth. Were you around when Enron fell? Not a pretty experience. Or when Allen Stanford tricked people out of their savings by stretching reality on “CD rates”?
What about your outflow? Is there money left over after paying all your expenses? Would you rather loan money to a company that has $1 left out of $4 of sales? Or to a company that has $2 left out of $100 of sales? Banks like the $1 out of $4 more than the $2 out of $100.
If something you believe about money turns out not to be true, when would you like to know the truth? Having “safe” money available that is predictable for you to pledge (collateralize) makes lenders far more comfortable about lending you money. In this case, “safe” means easily accessible and less subject to market risk. Systematically saving the money is a discipline about 9 out of 10 Americans lack. Except for payroll deductions to put money into their 401(k) plans, most Americans don’t have enough cash reserves to meet a $400 emergency like new tires or a dental emergency.
It takes both knowledge and wisdom and a commitment to the future to make wise, prudent decisions about your money. We all constantly battle between current lifestyle desires (see any ad not focused on medicine) and the future. As a business owner, you should have a clear understanding of where you are now, and regularly monitor projections of where you want to go.
We’d like to help you plan for the rainy day and the sunny day. It is wonderful to have access to capital without a hassle. Getting a very attractive rate is even better. We call this the Private Reserve Strategy.
Let’s have a conversation. Call 713-984-8044, ask for a mutually agreeable time to meet, or email us at firstname.lastname@example.org. We take a purpose-driven approach to your business and finances.
Securities and investment advisory services offered through World Equity Group, Inc. Member FINRA, SIPC, a Registered Investment Adviser. SMART Group Houston is not owned or controlled by World Equity Group, Inc. Neither SMART Group Houston nor World Equity Group, Inc. provide tax or legal advice. For tax advice consult with a qualified tax professional.