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Debt financing by means of a personal credit card

Monday, October 11th, 2010

Most of us (together with me) have made use of personal credit cards to be able to pay for the beginning or expansion of our enterprise. It is easy, swift, and readily available. The interest levels could be less than business credit cards. And, you could have explored your company loans or lines of credit. Yet there are several risks in utilizing your individual credit cards to fund your enterprise, in place of employing business credit cards or credit.

It’s not possible to deduct the interest. In the event you mix private & firm charges on your credit card, it’s not possible to deduct the interest since a percentage of debt is caused by private payments. For anyone who is carrying a good degree of debt, this might soon add up to a lot of money monthly.

You are going to miss deductions. In case you are arbitrarily making use of private credit cards for enterprise bills, you are going to predictably neglect to enter all those invoices into your accounting system. Which means you are going to miss a tax deductions that you deserve to have.

You will end up on “the hook” for what is often the business’ debts. Should your business needs debt financing, the company (and its resources) must be in charge of repaying that debt financing, not your own personal resources. If you use private credit cards then you’re definitely personally accountable for the credit, even in the event something happens to the enterprise (you close it down, for instance).

You won’t precisely observe the true expenditures of the enterprise. If you are studying the profits & loss documents of your enterprise and generating your money circulation predictions for future months, you will need correct specifics of your historical bills. In case you have expenditures “hiding” as part of your private credit card records, you will not be able to examine if your enterprise is in fact making a good profit, or if your enterprise features financial issues.

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Make a reality check before a loan check

Sunday, May 23rd, 2010

164Our reality check should either reinforce the efficacy of our process or help us understand just where our process has broken down. We can learn to improve our planning in the first step. We can recommit to executing our plan better in the second step. Perhaps we should evaluate more frequently in the third step.What can we improve on? How can we do better? We study the results of our process, draw conclusions, and decide how we will act right now.What’s the best decision we can make at this moment?

Sometimes the action we should take is simply to abandon the activity. Suppose we discover that we do not play well together. This is the perfect time—before we have too much invested in the partnership—to acknowledge the fact, pick up our toys, and move on. Companies frequently find that their cultures or technologies are not as compatible as they thought they were. Rather than ontinuing down a path to nowhere, it’s best sometimes to acknowledge the fact and look for a new partner. This is a healthy sign of maturity and growth. Like couples dating, you learn something about your partner and, just as important, you learn something about yourself. You have just increased your Partnering Intelligence.

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Devising a credit plan that will work out

Thursday, April 22nd, 2010

The first step is to decide what actions we should take to accomplish a task. Breaking down a manufacturing or sales process or a performance procedure into its parts is not hard to do.We also need to plan our relationship. We need to single out the components of the relationship that we agree are important: the nature of the relationship and how we’ll resolve conflicts, make decisions, and communicate. Like the logical steps in accomplishing a task, these preparations can lead to an open, constructive relationship. Whether we’re working on a task or the relationship, we cannot proceed
without a plan.

We carry out our plan.We do the activity.We solve problems, make decisions, and communicate just as we had planned.

Did we follow our plan? Did we end up where we thought we would? Did the relationship work out as planned? The phrase “reality check” is popular in business discussions today—we can get so wrapped up in activity, in the busyness of working hard, that we forget to stand back and see how we’re doing. In this step, we should primarily observe how well we’ve implemented our plan. What new information do we need to consider in the partnership?

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Loans and dividend payments

Wednesday, March 10th, 2010

Just as for forward and futures contracts, the holder of an option is not entitled to earn any yield on the underlying asset before the option is exercised and the underlying asset is owned directly. The yield on a directly owned asset is called the convenience yield. On the other hand, the option holder does not need to bear the cost that is related to the storage or maintenance of the underlying asset, called cost-of-carry. A large yield such as a big dividend payment can make it worthwhile to exercise an option early. Suppose a stock pays a dividend of 5% tomorrow and an investor holds a deep in-the-money call option (i.e. the option is highly likely to be exercised) that matures next week. If the investor could exercise the option today, he or she would need to put down the strike price today but would capture the dividend. If he or she were to wait until maturity, there would only be a need to pay the strike price in a week but the dividend payment would be missed. Clearly, the possibility of an early exercise can be valuable if the underlying asset provides a yield. In that case, an American-style option is worth more than a European-style option.

The net yield can be directly observed in the market (announced dividend payments) or estimated from related markets.

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What’s the intrinsic value of a loan

Wednesday, March 10th, 2010

The time to maturity is determined in the option contract. Generally, the longer the time to maturity, the more valuable is the option. The reason for this relation is straightforward for the American-style option: the holder of the option can always exercise the option prior to maturity. In addition, there is the possibility to wait and exercise the option at a later point in time. The longer the time to maturity, the greater is the value of the possibility to wait.

For European-style options, the relation of time to maturity and option price needs further explanation. A start is made by showing that an early exercise does not make much sense. Assume that an investor holds a call option with a strike at US$ 100 and a two-year maturity on a nondividend paying stock. The price of the underlying stock is currently at US$ 90. Obviously, an early exercise makes little sense, since the out-of-the money option would be worth zero immediately. Suppose the stock rises to US$ 110 over the next year. If the investor were to exercise the option now, he or she would need to put down US$ 100 (the strike price) and get the stock worth US$ 110. The difference between the actual stock price and the strike price of US$ 10 would have been gained, called the intrinsic value.

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