Debt is bad!!! Or that’s the message you hear most often. But I’ll let you in on a little secret – you actually get two types of Debt: Good Debt and Bad Debt.
If you are the right type of company you may be able to brett pittsenbargar seeking alpha who can help you. These are private investors who invest in starting companies who are expecting to make a lot of money in a short amount of time. Angel investors expect to receive about ten times the money they invested in just a few short years. There are very few companies out there that are able to grow that quickly.
You must find this out if you have ever filed for bankruptcy or thinking of doing so. It is important to know this before approaching a lender for financing. In most instances, you cannot get funded. Some will only accept you after a seven (7) to ten (10) year period have passed depending on the type of bankruptcy chapter you filed. Some non-traditional lenders will not finance you if you have had a bankruptcy less than three (3) years old. Be sure to ask this question before going forward.
Venture capital investors are always looking for the next big thing, particularly when it is technology oriented. If your business fits what they are after, they will provide you with installments of financing, known as “rounds”. In exchange, they want a chunk of the equity in your business. Their goal is to either sell the business or take it public and make a bundle.
How does the investment occur? Well, they are usually going to want a piece of ownership to collateralize their loan. The company needs to be valued and then a percentage of it put up in exchange for an investment amount. This is actually a good thing for most businesses. Why? With a vested interest, the angel will usually start getting involved with the business and lend their years of experience. Also, they will often introduce the business to parties they had previous relationships with, parties the business would usually have no chance of getting in front of.
Good debt is the debt that you enter into when you’re using other peoples money (OPM) to build riches for yourself. This would be things like buying property (the bank’s money) and renting it out or starting a profitable business (investor or shareholder money). As long as you’re making more money than the cost of repaying the debt, this type of debt is seen as good debt. Caveat : There is a Danger – Good debt can turn into Bad Debt overnight – so always know that there is a certain amount of risk attached.
Where does one cross the line from being a “trader” to an “investor”? Must you only buy–but never sell–to be an investor? If I turn my portfolio over ten percent per year, does that make me a trader? Twenty percent? One hundred percent? If I buy a stock and then sell it ten days later because its CEO just got indicted, does that make me a trader rather than an investor? Or does it make me a smarter investor? If I hold most of my stocks at least a year, does that make me an investor? Three years? Five years?
Therefore, that kind of financing is healthier for your business? If you’ll be able to swing it, debt financing is by so much the best. Relinquishing possession interests in your company should be avoided, that makes equity financing a Faustian bargain.