Stay Ahead of Law Changes & Protect Yourself Against Being Audited: Corporate Transparency Act and Reasonable Compensation

Should I Take Out a Business Loan?

This year has been a challenging year especially for small businesses. Some businesses may be struggling on deciding if they need to take out a business loan to keep things above water. This reminded me of a joke I heard the other day… I recently met a friend of mine while on an afternoon walk. “Hey there George, why do you look so down today?”  “Kevin, man, I’m in trouble.  I need money for my business, and I have absolutely no idea where to get it from!”  “Oh, I’m sure glad to hear that” I said.  “I was afraid you might ask to borrow it from me!”

Jokes aside, having access to business capital can be crucial to your company’s success.  Natural disasters (like the current global health crisis), market changes, new product development and countless other risks, challenges, and opportunities all scream for working capital.  There is a tremendous amount to unpack in this topic, but here we will cover some of my opinions on the concept of debt-free vs. leverage and how you can use working capital to do what you do best. You can also view one of our latest blog posts here for recession-proof business planning.

What is financial peace?

Dave Ramsey’s financial model outlined in his New York Times best-selling book “Financial Peace” illustrates the psychological solutions to staying out of debt. Mr. Ramsey, in my opinion, correctly hits the proverbial nail on the head regarding many people’s view on borrowing money, in this case, a business loan.  The world these days tells you that you can afford anything if you can just make the monthly payments.  Many people want what they want, and the lenders tell them they can afford it, so they buy it on credit.  Financial Peace provides the psychological solution that many people need to make the right decisions.  He teaches the zero debt, pay-off your lowest loan amount first approach.  This helps folks who see their mountain of debt, such as a house, couple of cars, student loans and credit cards, as something that can eventually be conquered.  And he is right, it can!

Financial Peace purposes that no debt is good debt.  While I see an enormous amount of value in this psychological solution for what is essentially a mathematical problem, some are able to see above that and into what it can be easily boiled down to.  Pluses and minuses.  In your business you likely deal with pluses and minuses every day.  So, let’s assume you can see beyond the psychological barriers of debt weighing you down and you’re able to use borrowed funds to earn you more than the interest you pay.  Leverage, when respected, can truly be a beautiful thing!

Assets vs. Liabilities

Now let’s use a counter point to Financial Peace. Robert Kiyosaki’s “Rich Dad Poor Dad”, also a New York Times best-seller, essentially takes an opposite view on debt.  Rich Dad Poor Dad explains the true value of your money earning you more money, teaching that the rich get richer because of this concept.

This can be applied to our topic, and specifically to you since it takes working capital for you to produce your product or service in your business.  In his book, Mr. Kiyosaki instructs that you can either purchase assets, or liabilities.  Assets earn you money while liabilities cost you money.  In your case, you and your business are the asset.  The more you invest, the more opportunity you have to grow.

Both books make fantastic points and really help to grow the reader’s understanding of fundamental financial concepts.  I would highly recommend them to readers of any financial background.  For me, it was crucial to get both sides of that “debt-free vs leverage” argument before I truly understood either.  It can be very easy to get caught up in one or the other and quickly desire radical change, but by consuming both I was able to find what I call the healthy middle.

How Do I Know If I Need a Business Loan?

Ultimately, as the decision maker in your business, it’s up to you to know your numbers.  Will a business loan net you the return on investment to exceed the interest costs?  Or, are you knowingly borrowing funds that you think will help you solve an immediate need, but cost you more in the long run?

While one may be superior to the other, both are viable reasons for taking out a business loan.  I only encourage that you make that decision knowingly, and with as much data as you can collect.  I also urge you not to fall into the psychological pitfalls of solving math-based problems with emotional reasoning.  Don’t listen to the world saying, “you can afford it”.  You very well may be able to, but you should come to that conclusion yourself or with the help of a financial professional.

Debt is a regular, and often essential tool in building a successful business.  Leveraging the capital you have access to, at the right time, and increasing your ability to consistently produce your product or service, can be the best business decision you’ll ever make.

We Would Love to Help You

I love helping business owners and individuals solve tax headaches and build financial vision.  Good business dictates you work your strengths and hire out your weaknesses.  At Molen & Associates we are passionately engaged, and we guarantee you will learn something new every time you work with us.  Give me the opportunity to teach you something new today by calling us at (281) 440-6279 or emailing us at info@molentax.com. I would love to work with you!

Kevin Molen
Tax Advisory Manager

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

2024-2025 Tax Updates

2024-2025 Tax Updates: Key Changes, Strategies, and What You Need to Know As we approach the end of 2024, it's essential to stay informed about the tax changes that will impact your upcoming filings. The Internal Revenue Service (IRS) has announced several updates for...

Required Minimum Distributions (RMDs): What Are They and Why Are They Required?

Required Minimum Distributions (RMDs): What Are They and Why Are They Required? As retirement approaches, understanding the rules around Required Minimum Distributions (RMDs) becomes crucial for anyone with a retirement account. RMDs are mandatory withdrawals that...

HRA 105 Reimbursement Plan: A Comprehensive Guide for Businesses

In today's evolving healthcare landscape, businesses of all sizes are searching for cost-effective ways to provide health benefits to their employees. One increasingly popular solution is the HRA 105 Reimbursement Plan. This plan offers flexibility, tax advantages,...

Do I Need to Pay Taxes on Payments Received in Cash?

Receiving payments in cash might seem like a simple and hassle-free way to manage your finances, especially if you're a freelancer, small business owner, or even just doing a few side gigs. However, while cash payments are convenient, they come with responsibilities...

Bonus Depreciation: Maximizing Tax Benefits for Businesses

Bonus depreciation is a powerful tax incentive that allows businesses to accelerate the depreciation of qualified property, thereby reducing taxable income and enhancing cash flow. This article delves into the intricacies of bonus depreciation, its eligibility...

Which Accounting Software to Use – QBD, QBO, Excel, NetSuite, Wave, Xero, etc.

In today's digital age, choosing the right accounting software is crucial for businesses of all sizes. With numerous options available, it can be challenging to determine which software best suits your needs. This article will explore some of the most popular...

Personal Property – Primary Residence Capital Gains Exclusion: How Does This Work?

The capital gains exclusion for the sale of a primary residence is a significant tax benefit available to homeowners in the United States. This exclusion allows taxpayers to exclude a substantial portion of the gain realized from the sale of their primary residence...

Personal Property – Primary Residence Capital Gains Exclusion: How Does This Work?

Personal Property – Primary Residence Capital Gains Exclusion: How Does This Work? The capital gains exclusion for the sale of a primary residence is a significant tax benefit available to homeowners in the United States. This exclusion allows taxpayers to exclude a...

Compensation and K-1 Reporting for Partnership Owners

As a business owner of a partnership, understanding how your compensation and earnings are reported and taxed is crucial for managing your finances and staying compliant with IRS regulations. Unlike S-Corporations (S-Corps), partnerships cannot pay their owners a W-2...

W-2 Salary vs. Distributions vs. K-1 for S-Corp Owners

W-2 Salary vs. Distributions vs. K-1 for S-Corp Owners As an S-Corporation (S-Corp) owner, understanding the distinctions between W-2 wages, distributions, and K-1 profits is essential for managing your tax obligations and business finances. In this article, we will...

Request an Appointment Today

5 + 12 =

Call us at

Pin It on Pinterest

Share This