Business Loan

How to Build Equity with Good Debt?

Before we discuss on building equity, it is most important to know what is equity? and why should should one build equity?

Lets define equity from different aspects:

From a financial point of view, its the total assets minus total liabilities
from a personal point of view, its the total receivables minus total payables
from a spiritual point of view, its total relaxed thoughts minus stressed thoughts

One’s goal in life should be build lasting equity and that is where all our action should lie, this will take oneself on a spiritual path of relaxed mindset, and hence the main reason WHY one should build equity.

On the contrary, when our actions result in a path of accumulating more liabilities and less assets, then this where we need to take a conscious decision to cut our losses and begin afresh rather than being married to that idea.

The more equity you have, the better off you’ll be. There are two basic ways to build equity in any business which is

  1. Increase in Value of product / services
  2. Decrease in debt

Let me discuss the second point in detail since that is where the trick lies.

A. Reduce the Debt:

With most loans, you pay down your loan balance a little bit with each monthly payment. The shorter you have your loan tenure, the more principal you pay (more of each payment goes toward equity, and less of each payment evaporates in interest charges). This process is automatic on most term loans.

That’s the passive approach to eliminating debt. But you may want to accelerate the process and build equity more quickly. Here are several strategies for doing that.

B. Choose shorter terms:

Shorter loan terms cause you to pay down debt and build up equity more quickly than long-term loans. For example, a 10-year mortgage would be better than a 20-year mortgage if your primary goal is to build equity. A low rate combined with the fact that you’re paying interest for fewer years means you’ll spend less on interest and save money over the life of your loan.

C. Make extra payments:
Even if you have a 20-year mortgage, you can speed things up by paying extra amounts. Each additional rupee you pay above your required monthly payment reduces your debt and adds to your equity—just make sure your lender applies those payments to the principal.

If that seems too complicated, just send an extra payment from time to time. Again, be sure your lender applies any extra payments to the principal, not the interest.

Leave it alone: Second mortgages and refinancing can interfere with debt reduction. If you can save a bundle by refinancing, go ahead and do so. But remember that with most loans, the earlier payments go largely towards interest rather than principal reduction. Every time you start over, you delay (or at least slow down) the equity-building process. Just because you are eligible to borrow more, avoid that temptation as it increases your debt, reducing your equity.

D. Business Loans:

Business is an ideal place to build equity faster, and when an oppurtunity knocks, be equipped to grab it with both hands. Its always prudent to take business loan to capitalise these oppurtunities to fulfil orders, build reputation and hence build equity. Take loans which are of short tenure which can be repaid with existing cash flows, this shall help you to pay off debt in a passive approch and hence reduce your stress.

Hence strive towards building lasting equity which enhances your life on a longer run.

Sushil Bokdia
Partner, Bokdia Finance

Bokdia Finance specialises in business loans, it strongly believes in the process of building equity by debt rather than the losing equity by debt.

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