Making Debt Work

Any entrepreneur knows the importance of having the right staff, quality of goods and services, pricing, and customers. But too many small business owners fail to recognize another instrument in their quest for success – debt. Debt can be invaluable when used for mortgages, capital, equipment loans, and operating lines. Understanding the options available, and picking the right ones, can sometimes make the difference between business success or failure.

There’s a difference between “bad” and “good” debt. “Bad” debt is any debt you can’t afford. It carries high interest rates, and finances things you could go without. Undisciplined use of credit cards, for example, could lead you into “bad” debt. “Good” debt, in contrast, finances productive assets or assets that appreciate in value. Using a mortgage to buy a house is a classic example of “good” debt.

When you borrow to buy non-registered investments, or to invest in your business, you get the best of all worlds – asset growth with interest deductibility.

Borrowing money to fund business operations or buy capital assets for business use can be a shrewd move. While your business benefits from having operating capital or a new piece of equipment, you get to deduct the interest costs from your taxable income.

Because interest is deductible when used to borrow funds for earning income, many people turn to “cash damming”. What does that mean? Say you’re a sole proprietor of a business with a $100,000 home mortgage and $100,000 in business income. One option is to use the business income to pay for business expenses. But it can make more sense to use the income to pay off the mortgage, and get a home equity loan (i.e. using your house as security) to finance the business expenses.

Why? Because with an investment or operating loan, the interest is tax deductible; it isn’t on a mortgage used to purchase your home. Basically, you use the equity to buy assets that aren’t used for income-earning activity, and buy income-earning assets with the borrowed money.

Another useful strategy, especially in light of low interest rates, is borrowing money to invest, known as leveraged investing. Leveraging makes sense when:

• You have a long term plan – enough time for the investment to grow beyond the loan amount plus interest costs.

• You invest rather than speculate, concentrating on investments that pay interest, dividends and trust income, to get compounding working for you.

• You diversify your portfolio, distributing investment risk among equities, fixed-income and cash.

• You have surplus cash flow, with the ability to cover increased interest costs down the road.

Cautious and prudent leveraging can accelerate asset growth – but you must make sure that you understand, and can afford, the risk. In the business world or in your personal life, debt used in appropriate amounts, for appropriate purposes, can be a sound financial tool.

The postal rate just went up again in May. Is there any way I can save on postage costs?

The United States Postal Service (USPS) sets the postal rates, so there’s no wiggle room there. However, you can save on the cost of gas and lost productivity from sending an employee to the post office by printing all your postage at work or home with online postage service.

USPS offers its own online postage service, Click-N-Ship, that lets you print Priority, Express, Media Mail and even international labels from the website. Click-N-Ship also offers delivery confirmation and insurance. Once the postage is printed and on the package you can have a mail carrier pick it up for free.

The postal service also has four vendors approved to sell online items and services that the Postal Service sells. They are: eBay, Endicia, Pitney Bowes and Stamps.com.

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How to choose a bank for your business

CHOOSING A BANK to any small business owner is very important. I can’t express enough the importance of separating your personal from business finances. I suggest you use a bank that you can trust, one that is close to the location where you do business, offer competitive rates and one that allows the processing of credit card through the internet (if that’s where you do business). A bank that is fast and accurate with their information is key to online banking and bill management. I would also look at banks offering good start-up programs, like free business checking and credit cards with low or no monthly fees.

You may consider the bank that you use personally, especially if you have a long term relationship with them. Once again, if you use the same bank for personal transactions as well as business it is very important that you keep the accounts separate from each other. Don’t allow balance transfers of draft protection across business and personal accounts. This is a huge mistake that many start-up small businesses make and often results in failure including the draining of their personal accounts. You may also want to consider a bank that is a Small Business Administration (SBA) lender, which guarantees small business loans; and get a referral from and attorney or a local chamber or commerce.

BUSINESS GETS PERSONAL while considering the menu of small business services a bank offers; get to know its people, especially at the branch you expect to visit regularly. It’s important that your prospective banker wants a full relationship and will be able to help your businesses down the road.

As a business grows, it needs change. Good bankers invest the time to understand their clients and their needs. Your banker can save you money in fees, grant you a line of credit, and increase your credit via loans, performance bonds and letters of credit. With their extensive connections in the community, bankers can also provide introductions to potential customers, suppliers, employees and investors.

DOES SIZE MATTER? Many small and medium banks cater specifically to small businesses, while some larger institutions have small business divisions.

Small business owners should place a premium on personal service. This means connecting with a banking representative who will take the time to get to know you and your business. Most small businesses don’t need a bank with national presence. A community bank offers strong pros to a small-business person-proximity to the business, knowledge of the marketplace and local ownership. In addition, local banks tend to have more employment continuity. Often, a corporate banker looking to advance does a tour of duty and moves on.

Large banks, such as Wachovia and Bank of America, often employ specialists who are tuned into small business issues and offer access to the people who get things done. Also, if you require regional and national representation or branches outside of the community, a large bank might be a better choice.