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In Business The Proper Utilization Of Debt Can Increase Earnings Dramatically!

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Good business practices suggests that a company should always take advantage of any and all credit facilities that they can obtain, subject, of course to getting them at a reasonable cost.

Many business people hate to be in debt, to owe any money at all, but debt is the foundation of Western economies and proper utilization of debt facilities can increase business earnings dramatically. One must remember that liabilities are only relative to assets and it is important in any business to utilize their assets to increase their business sales and hence profits. This doesn’t mean that a business should immediately spend every dollar that they can obtain on credit. A company still must manage it’s debt and ensure that the use of the debt will truly enhance the business, at minimum the utilization of the debt must return enough funds to pay the debt off over a reasonable period of time.

If we look at a retailer, and their inventory is completely paid for and if they increased their inventory they could increase their sales then it would, in most cases, be a good strategic business decision to borrow money against the inventory that is paid for in order to purchase additional inventory. As an example, if the retailers gross profit on their sales was 30% and they have 12 turns per year on their inventory and the interest rate is as much as 12% per annum their gross profit would only be reduced by 1% to 29% on the inventory that they purchased with the borrowed funds. In other words, by borrowing against the paid for inventory, over a one year period, the company would have earned an additional 348% per annum on the money they borrowed. Sounds unbelievable

The company earned an additional $34,800 by borrowing $10,000, utilizing there paid for inventory as collateral, for a period of 12 months.

It is much easier to arrange for credit facilities when a business really doesn’t need the funds and when the business has an impressive balance sheet. On the other hand, it can be very difficult or next to impossible to obtain credit when a business really needs it.

A business should arrange for receivables and inventory lines of credit from their bank or other financial institution as soon as the company is in a financial situation to do so. Bankers love to lend money to businesses that don’t have an immediate requirement or need for the money. It’s how they make money! Financial institutions charge a very low fee, usually in the order of 0.25%, a few do not charge at all, for an unutilized line of credit or what is termed in the financial industry as a standby line of credit.

You can negotiate business lines of credit from your bank or other financial institutions such as American Express. Amex will provide most small businesses, with a reasonable business history of earnings, with a $50K credit line for a fee of $200 per year plus interest on any money that the company borrows. In other words if a business doesn’t utilize the credit line, then they have only expended $200 to have the availability of $50K. In the case of AMEX, obtaining the funds is as simple as writing a check.

Utilizing a company's assets as collateral to enhance the company's profits is good business!

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