- July 23, 2016
- Posted by: Roger Walker
- Categories: Credit, Finance
As an entrepreneur and as a consumer, I have very clear that the loans can be very useful, provided they are used in an appropriate manner. And my opinion is that the main criterion for whether debt is worth analyzing things from the perspective of value creation. Loans, urgent loans and financing of any format are useful if they help create value.
What I mean by value creation?
It is a very simple idea. The loan will have to help finance something to increase your wealth, or your company, in the short, medium or long term (depending on the situation), usually by an increase in revenue. Moreover, the increase in value has to be higher than the cost of financing, as loans involve paying some interest. If not create wealth, all that is achieved with a loan, it is to postpone a problem and reduce the resources available.
Examples of credits that create value
Probably the clearest case of credits that help create value is to finance an investment in machinery. Tools and equipment allow to produce goods and services, which in turn sell to potential customers, generating positive cash flows and increased the wealth of the company.
Another case is a loan to finance some studies. If a person needs access to training, and that such studies have good job opportunities or let you request a higher salary than the current, then it is certainly a good idea to use credit to finance such training, if there are no savings to address spending. At the end of the day, it comes to improving the competitiveness and employ ability by investing in oneself.
Consider now the case of funding for a private car with a loan. Usually, it is more advisable to save and buy the vehicle with its own resources, since it will lose value as you go using, and that even the residual value of the car can be less than the outstanding loan amount, if any funded. In such cases, it is more interesting to buy a cheaper or second hand vehicle, not to have to resort to credit.
You may also like to read another article on Heygom: What are the types of credit?
However, there are also cases in which a loan may be the solution. Imagine that a person does not have money to buy a car, even second hand, and has got a job that requires him to go with own car because the place is not accessible by public transport. Without vehicle no possible income and therefore buy the car resembles a business investment. If necessary finance it , worth in that case.
Another dubious case could be an operation of cosmetic surgery. Usually, finance is not recommended, but there may be cases of people related to the image that they get a direct benefit of having a better appearance work, and are able to get more value (via more income) by investing in themselves.
Analyzes the purpose of your funding
This article aims to invite you to reflect on the importance of funding for your business (or your personal life). Every time you go to need a loan, you should carefully define its purpose, the goals you plan to get through this funding , preferably with an indication of dates and monetary amounts (if only estimates). In this way you can differentiate between those credits that will help you create value, and you should hire, and those who would not be useful, of course to avoid.