Comments on: Is Debt Necessary For Generating Income?

By: Armen

Armen — Sun, 30 Nov 2008 10:01:46 +0000

I financed almost all my startup expenses except the cars by my personal credit cards. If I didn’t, I wouldn’t have equipment and advertising which makes the business running. It is very common that those who start a business first use their credit cards until they are ready to create a corporate credit and little by little move everything to corporate credit card. Otherwise, how else? Even if you have cash it’s more risky to put it in business, in case it fails, you can’t get it back as opposed to unsecured debt.

By: SteveJ

SteveJ — Fri, 28 Nov 2008 14:44:24 +0000

It seems to me that if you can show a history of earning $5000 off of $25000, then any bank in town will be thrilled to have your business and offer you a reasonable business loan.

By: sbt

sbt — Fri, 28 Nov 2008 03:25:25 +0000

I don’t like the idea of financing the business with personal debt.

My husband and I are part owners in a business getting off the ground. We chose to structure the business as an LLC to help protect our personal assets. We were able to get a business loan at only 5% with some state new business loan incentive program. We chose to do that rather than sell our mutual funds and pay cash, since right now they are worth about half what we have in them. hoping to get the funds back up closer to what we paid for them before we have to cash them in. Because we are frugal, we were in a good position to get the business loan. Yes, of course, should the business fold, we will be personally liable to repay the loans, but we want to keep the business books and personal books clearly separated. This is important when you have a corporation or partnership.

I suspect that the wife above is not clear about what exactly is happening. I suggest that she and her husband have a very good talk, and make sure that they review the business finances together on a regular basis. I also liked the suggestion above that she learn more about personal finance on her own.

By: LC

LC — Thu, 27 Nov 2008 19:05:09 +0000

The worst risk in credit card debt is that they can change any of the terms with just one 15 day written notice. Interest rate, drifting payment date, double billing cyle — you are really asking for it when you deal with a credit card company.

By: Dividends4Life

Dividends4Life — Thu, 27 Nov 2008 18:38:48 +0000

Generally, the best option is always to go with minimal to no debt. There are really no sure fire, can’t miss ventures, and when they misfire the lender still wants his money.

Best Wishes,
D4L

By: Cathy

Cathy — Thu, 27 Nov 2008 16:49:17 +0000

The first thought that came to my head was Margie’s husband isn’t being honest about his business’ finances.

By: Free Your Mind

Free Your Mind — Thu, 27 Nov 2008 13:45:35 +0000

Rather than focus on whether or not this story and these numbers make sense, I will just for arguments sake (to answer Margie’s question), take them to be true.

If this 25,000 can generate 5,000/month, then that is 60,000 per year. That beats out 9,600 per year by over 50,000. So this is “very good” debt.

And if they can pay their debt off in six months as Margie claims, then I don’t think that the debt is (or will be for long) having an adverse effect on their personal finance situation.

I know a lot of people who WISH they could say they would be able to pay off their debt in 6 months.

And also, if they have the 25,000 cash on hand… then the 25,000 debt (which they could pay off if need be) is NO RISK.

But this is of course, assuming that what she claims is true. If so, then they are doing the right thing.

By: Shymom

Shymom — Thu, 27 Nov 2008 13:25:05 +0000

I read it as 25K on credit card plus and undisclosed amount on a personal loan. As we don’t know what the amount is on the loan there is no way to accurately figure out what the interest rate is.

By: Dana

Dana — Thu, 27 Nov 2008 05:48:46 +0000

I read her as saying that the $25,000 was in BOTH credit card debt AND the personal loan. Whatever the bank might be charging in CC interest, someone who tenders a personal loan is not governed by consumer laws and can charge whatever interest rate they like.

Their monthly payment between two credit cards and a personal loan adds up to $3200. Ouch. But if they’re plugging away at these to pay them off in six months, that’s pretty good. I wish I had three grand a month to throw at my debt.

I wouldn’t say they’re not being frugal *now*, even with the balances. For all we know these were run up a few years ago and this couple has turned over a new leaf since then.

And we can’t say he’s scamming if we don’t know what he does for a living.

By: steve

steve — Thu, 27 Nov 2008 04:46:05 +0000

Anyone who is carrying significant debt on credit cards, even at low interest rates, might want to be aware of what has recently happened to me on two credit card accounts. In the last two months, Discover and Chase have changed my minimum payments from the former 2% to a new minimum of 4% and 5% (respectively) of the outstanding balance. If you are carrying significant debt on your cards right now and paying the minimums, it would be wise to plan for the likelihood of having to come up with an extra 2-3% of your outstanding balances every month to stay in their good graces.

I don’t know if they are doing this across the board, or because I have been carrying balances at a low rate and don’t make purchases on these cards. I suspect that plays into it. If you are carrying significant balances, it might be worth it to make a couple of small charges on those accounts (like 20 dollars or so), on the chance that the charges that their screening system might not see you as an inactive account they’d like to “hurry off” of their books. Be aware that if you do, you are carrying those charges at the going rate for purchases until the card is paid off, though.

By: prodgod

prodgod — Thu, 27 Nov 2008 04:16:18 +0000

Actually, I have converted nearly ALL of my debt to credit cards ($54k), with the exception of mortgage. Why pay the higher rates on my business loans when I can now carry balances of 0% for 12-18 months on each card? This way, 100% of my monthly payments go to principle, which allows me to make minimum payments and build interest-earning savings. Before each promo rate expires, I transfer the balance to another 0% card. Then the old card offers me another 0% rate to come back, which I use for the next card in line with a rate about to reset. I’ll have the debt paid off sooner this way.

Yes, there are fees with each transfer, but they are substantially lower than what even a low interest rate would be.

If you have good credit, credit cards can be a useful financial tool. And for the record, this has not seemed to affect my rating.

By: Sarah

Sarah — Thu, 27 Nov 2008 01:04:04 +0000

I agree with the posters above–is her husband dealing in the white horse?

By: RDS at Smart Financial Values

RDS at Smart Financial Values — Thu, 27 Nov 2008 00:19:43 +0000

I don’t know enough about the business in question to comment on the details of this story, but in general I agree that debt can be useful. While I don’t think that there is such a thing as good debt, there is certainly bad debt and less bad debt. Less bad debt is debt that helps you start or grow your business, buy a home, or purchase a car. In a perfect world, we would all be debt free. However, given that most of us don’t have enormous piles of money sitting around, in the right circumstances debt can be useful.

One of the only stories I have ever heard about useful credit card debt was about the athletic apparel company Under Armor. Under Armor was started by a young man and financed heavily by credit card debt. Its a risky strategy, but payed off in this case. So, if your credit card debt is helping you start a world renowned company then it is probably less bad debt. Otherwise, there are very few excuses for running a balance on your cards.

By: Jacinta

Jacinta — Thu, 27 Nov 2008 00:16:54 +0000

None of these numbers make sense. If we were to assume that the interest amounts were right, then we have: income: $5000. interest: $800 difference: $4200. But she then says that leaves “about $1,200 on each one of the the personal loan and two credit cards.” 1200* 3 = $3600, so where’s the missing $600 going? The only number that does make sense is that if these parts are true they will have paid off $25,000 in 6 months.

If the debt is instead $250,000 then for $800 in repayments they’d be paying an average interest rate of 3.8%; for credit card debt this seems really low. But it would mean that the $5,000 a month in interest would only require the investment to be making 24% p.a. which is probably manageable. Of course, this won’t be paid off in 6 months time.

By: moneyclip

moneyclip — Wed, 26 Nov 2008 23:54:10 +0000

I would simply rest better knowing I was debt free especially in the state of the current global economy. Nothing is guaranteed and being out of debt completely certainly is better than being in debt, no matter the reason.

By: cv

cv — Wed, 26 Nov 2008 23:23:56 +0000

The thing I find troubling about this story isn’t so much the numbers themselves, which I agree are odd, but the way she says “he chooses to keep the money in the business” and “I used to feel very scared about carrying so much debt, but when he explained it to me…” It sounds like she’s really in the dark about their finances and the finances of the business. It works for a lot of couples to have one person handle most of the finances, but the fact that she’s writing in to the Simple Dollar means that she’s not entirely comfortable with the situation. If what she says is all true the debt issue will disappear in a few months, but I think she and her husband need to work on their communication about money. Once they’ve paid off their debt, what will they be doing with the income that had been going to debt? Reinvest it in the business? Save for retirement? How risky is this business that can generate a 20% return in a month? Does that mean they need a large emergency fund? She should understand and have a say in these decisions, not just have her husband explain to her whatever he chooses to do.

By: Lurker Carl

Lurker Carl — Wed, 26 Nov 2008 22:58:31 +0000

Everything about Margie’s story defies logic unless hubby is a loan shark or bookie.

By: Kim

Kim — Wed, 26 Nov 2008 22:53:29 +0000

It’s hard to get past Margi’s first sentence in which she claims that she has $25,000 in CC debt and considers herself “pretty frugal”.

By: Kevin @ The Money Hawk

Kevin @ The Money Hawk — Wed, 26 Nov 2008 22:46:13 +0000

I think this guy is lying to wifey. I want to know exactly how that debt is “generating income”.

This guy’s business and personal finances could be in danger for all we know; maybe he wants to keep it under wraps by pretending he’s in complete control?

I own a small business. Guess what, if you can generate income just by keeping money in the company, you can generate income without debt.

This definitely doesn’t smell right.

By: LC

LC — Wed, 26 Nov 2008 22:33:57 +0000

This is exactly what leverage is. Of course we know how leverage can be a risky two edge sword. But I can’t imagine a scenario where credit cards would ever be useful. They do not offer balances sufficient nor interest rates affordable. I would say that it is very smart to borrow money at 7% for a company that generates 15%, because you are not even using your own money. Just like buying a house — you keep the profit, and the bank took the risk.