Personal and Business Debts That Affect Small Business Owners

As a business owner, your first priority is
the life of your business, but if you really want your business to run efficiently, at
peak capacity, you must get your debts under control. In order to do that, you need to know the
good, the bad, and the ugly side of debt. You know, there are multiple types of debts
that we interact with daily. Remember, debt is basically when you owe money
for a good or a service. If you stopped and bought a coffee this morning
on the way to work and used your credit card, that is a debt until you pay your credit card
bill. In today’s video, we’re gonna discuss the
most common types of debt which cause us problems and can cause our businesses to struggle. What I classify as “Good” debts, if there’s
such a thing as good debt, is whenever you borrow money to help you produce income. For example, let’s say I took out a loan to
buy a business. That could be a “good” debt. Let’s say you took out money to get an education. That could be a “good” debt. “Bad” debts are those debts which don’t give
us a return. What do I mean? People borrow money to go on, like, a vacation. Yeah, we’ll have a good time on the vacation,
and we’ll have good memories, but man, we’re gonna be footing that bill for years to come. That’s a “bad” debt. And then we’ve got “Ugly” debts. “Ugly” debts are those that damage our net
worth. Those are the ones that keep us up at night,
like every waking moment, we can’t stop thinking about them. These things can be gambling debts or payday
loans. I mean, these are like stupid debts, right? They suck the life out of us. Let’s talk about the different types of debt. First, let’s deal with mortgages. You know, mortgages comprise of greater than
67% of the debts Americans owe. After all, we have to have a place to live,
and owning a home is just another facet of the American dream. I mean, I get it. However, we’re looking at 9.9 trillion dollars
in debt across the board in the country because of mortgage debt. With the median down payment just coming at
about 5%. We’re literally financing 95% of our homes
in the United States. I’m not gonna tell you that a mortgage is
a bad investment. Sure, there are those that have that opinion,
and there are those of you who think having a mortgage is a good investment. What is not a wise move is taking out a mortgage
on a house bigger than you can handle. That is precisely what lead to 8% of mortgage
holders defaulting on their house loans during the financial crisis of 2006-2009. Prior to the Great Recession, home ownership
hovered at about 69% and has dropped down to about 63% as of 2017. Just keep in mind that the mortgage is likely
your largest personal debt. Now, let’s look at the 2nd largest debt that
American’s face, and this one… it’s all over the news waves these days, and that is
student loans. Yeah, it’s a hot topic. Both political sides are dealing with this. Student loans come in different shapes and
sizes. They’re meant to help those who can’t afford
to pay for college all up front. A student loan is basically where you borrow
money to go to college to get a degree. We kind of get that. And of course, going to college and getting
a degree is a worthy aspiration. So no one is faulting you for taking out loans. After all, those with a college education
are estimated to make about $20,000 more than those with a high school education. So student loans would definitely line up
as a “Good” debt. However, we have to be careful. Do you know that Americans are carrying $1.48
trillion? Let’s say that again – $1.48 trillion. T. Trillion dollars in student loan debt. That is a ton of money. Now, while spread over 44 billion people,
it’s still a staggering number, nonetheless, especially when it’s taking away about $350
of our monthly budget. You know, graduates in 2017 came out of college
owing an average of almost $40,000 a year in student loan debt. Sadly, 11.2% of these highly educated folks
are going to fall into delinquency on these loans. Look, you and I didn’t put all the time and
effort into starting our business to become one of these statistics. If you hear these numbers and statistics about
student loans, and you’re like, “Brother, you’re preaching to the choir,” hey look,
we’re gonna get it under control. The next debt we’re gonna examine is perhaps
my biggest pet peeve. If you watch any of my videos, then you know
this one drives me batty, and that is car loans. Obviously, we all need a car. We’re not gonna ride a horse and buggy. Well, maybe you are, but most of us are not
gonna ride a horse and buggy, right? We do need a car to get around, but what we
don’t need is a brand new $40,000 vehicle. Let me say it again. We do not need a brand, spanking new $40,000
piece of metal with paint on it. That’s just plain stupid. Yeah, I said the “S” word. Car debt is one of those debts which can quickly
become “Ugly.” See, cars are not an asset. They are a liability, plain and simple. See, an asset is an item that we purchase
which appreciates in value or provides us an income, and frankly, cars do not appreciate
in value, nor do they provide us an income. Americans owe almost $569,000,000 for their
automobiles. Nearly half the country. That’s a whopping 44% with the average payment
being in excess of $500. Auto loans are actually our third largest
debt, coming just under student loans in the United States. So next time, before you go out and sign on
the dotted line for that big, fancy, bright and shining dream car that you’ve always been
thinking about, let’s take a time out, and let’s think about how it fits into our overall
financial plan and our goals. And if you’ve already made that commitment,
we’re gonna give you some tools on how to get that car debt knocked out fast. And now, friends, it’s time to tackle the
Achilles Heel for most Americans. Can you guess what it is? If you said credit card debt, then you’re
a rock star. This is one of the murkiest of all debts. It can be good when used correctly, but when
it goes bad, it is so ugly. I mean, folks, it’s like falling out of the
ugly tree and hitting every branch all the way down. Here’s are some stats on credit cards. According to the U.S. Census Bureau, the majority
of homes in the United States carry an average of $16,000 of credit card debt. Using credit cards can be rewarding, but only
if you pay off what you use every month. Otherwise, you’re digging a hole which could
take years to get out of. The good news is, 45% of Americans do pay
off the balances each month, and only 28% carry a balance all year. We’ve hit the big 3 when it comes to consumer
debt, but now let’s deal with a few others that you may encounter as a business owner. One type of debt which you may encounter is
often called a Line of Credit, or you may see it spelled LOC. Sometimes these come in the form of Home Equity
Lines of Credit or Personal Lines of Credit or Business Lines of Credit. Basically, it’s where you have an open check
book if you keep borrowing and paying it off. You know, another common debt is a judgement,
and this is when you owe a creditor, and a creditor’s taken legal action against you,
and they receive a judgement. For example, let’s say you’ve been fighting
for child custody, and all of a sudden, you’ve racked up 15, 16, $18,000 in attorney’s fees,
and the attorney gets a judgement against you, and now the court demands you to pay
them a consistent amount of money. That is a debt. That’s a judgement debt. You know, the worst debt out of all… I mean, this is frankly the ugliest debt…is
tax debt. You do not want… Let me say it again. You do not want the IRS as a creditor. You do not want that. They can actually go into your bank account
and seize your assets. This is where a good CERTIFIED FINANCIAL PLANNER
and a good Certified Public Accountant can help you and your business minimize those
tax liabilities. Don’t discredit the worth of these professionals. Let me give you an example of Sally. Sally is a typical business owner, and before
she knew it, she made a lot of money in one year and had not saved any money for her taxes. Low and behold, tax day comes, and she owes
the IRS $200,000. That’s a lot of money, folk, especially to
owe Uncle Sam. Uncle Same doesn’t care. He’ll come in and just close our businesses
down. Well, in Sally’s case, the only way to pay
off the debt is to make more money, and when she makes more money, she owes more in taxes. So friends, the IRS is the last person that
you want to have. This is the ugliest debt that I can think
of. Now, let’s look at the business side of our
debt. Two-thirds of small businesses fail within
the first two years according to the SBA, or the Small Business Association. If they make it to that 2-year mark, only
half will last greater than 5 years, and only a third of businesses get past the 10 year
mark. You know the number 1 reason why businesses
fail? It’s cash problems. Cash flow. We don’t have enough cash. 82% of businesses fail in those first couple
of years because of cash flow problems. It doesn’t mean you’re not making any money. In fact, you could be making a ton of money. It just means maybe you’re not getting the
money at the time you need to cover the liabilities. Here are a few types of debts which business
owners face. First and most common is probably a business
Line of Credit. I have one of these, and many times, I recommend
our clients have one of these. I usually recommend that people use a Business
Line of Credit whenever the cash flow is not uniform, when the cash flow’s bumpy. Why? Because life happens, and we never know when
we’re gonna need money. You never know if that income is gonna come
int from that particular sale, and now you have to meet payroll and meet your employees’. And as I mentioned earlier, a business line
of credit is a revolving line of credit. Another common debt in business is acquisition
loans. Acquisition loans are when we borrow money
to buy a business. You know, most of us don’t have enough cash
to buy a business outright. No, we go to an institution, and we borrow
money. In similar fashion, we also use real estate
loans. A real estate loan is where we borrow money
to buy a piece of real estate. Perhaps you need to buy a piece of property
somewhere for your business. You’ve grown, and now it’s time to expand. Again, we may not have the amount of money
needed to purchase 100% of the real estate, so we go out, and we borrow money to buy the
real estate. Sometimes a business needs money to buy a
piece of equipment. I personally believe that no debt is “good”
debt in this category, meaning equipment has a very short life, and we wanna make sure
that our long-term matches the life of our equipment. So friends, look. Debt matters. Debt matters in our personal life, and man,
it especially matters in our business life.

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