I told the client he owns his home no matter if he buys a house or rents because a home is the people and the house is brick and mortar.  (He was shocked when I stated I rent a house.)

With previous housing conversation started, I told my friend a house has no guarantees just as a business has no guarantees; which leads me to the following statement. ‘Which produces income? The house or the business?’ I went on to say a quote I heard several years back, ‘buy the company, rent the house.’

Income can buy the house, but a house doesn’t not produce income.

Don’t get me wrong, I am not against owning a house, rather I understand a house for what it is – shelter (basic to luxurious) and has income potential, but it must be rented or bought and sold. In the case of renting or “flipping”, a house is simply a product as any other in its basic concept.

More on this story later as it pertains to how he was getting some funding…check back, you’ll want to read it.

(The question is straight-forward and no other assumptions are implied.)  “What is your best option?”

Choices ranged from ignoring the creditor’s attempts to collect the money to telling them the truth about the situation and seeking cooperation.  Other possibilities included setting for a lump sum amount for pennies on the dollar to a payout over a couple of years time.  The final choice is to pay the full amount plus interest over a year, but ask for no payments for the first year.

As it turns out, the answer to the aforementioned question is the final option.  No payments for the first year and the rest paid out over the second year.  This option will be the most expensive, but makes financial since as described by the party producing the question.

My take from a struggling business would concur with the answer.  No payments protects immediate cash flow and limited resources while reducing some risk; and, the no payments choice allows the business the ability to continually try to make money over the course of time to stay in business and hopefully turn things around.

However, from a creditor’s viewpoint, I’m not going a full year without getting paid.  (Even though the question was around you or me as a struggling business and our options, look at the other side as if we are the ones dealing with struggling business as well.)  I want some type of monthly cash flow myself.  As a business, I’m not the bank.  Furthermore, working things out, but collecting some amount regularly might keep their doors open long enough to get my money back; or, at least I will settle for some monetary amount, but I won’t settle for a customer not being upfront.

If the business avoids my calls and doesn’t want to structure some type of agreement, one last thing I might do as a creditor if I do not get my money, I might just send them a 1099-Misc. and treat the amount they owe me as a GIFT!

Why would I send the business or person owing me money a 1099?  First, I’ve lost.  I’m out either the merchandise or my time for services and can’t recover the loss of profit or the cost.  Next, the 1099 is a revenue form filed with the IRS that shows income to the other party.  I might not get paid, but the party owing me the money will have to show the amount as income and pay the taxes (or adjusts their taxable income) to the IRS.  One or two of these 1099′s can earn the reputation that when doing business means honoring commitments by the customer, not just allowing people to walk away.  Go to the bank for financing.  Look at what happened to furniture stores, such as Lacks Furniture in Texas.  They got in trouble financing the furniture and are now out of business.

Getting back to the main answer though, the key is cash flow.

No payments increase cash flow, but what you do with the cash flow difference is very important too.  Speaking of the importance of cash flow, payments, etc. and although I’ve written Barking With The Big Dogs primarily around the house and a mortgage, the concepts apply to any business.  Many business examples will be demonstrated as well.  One such business is the bank itself and you can read the importance of payments and other business tactics and use them on a business or personal level.

Then again, I found the statement on the internet and wasn’t there either, but I remember the quote as a kid and we didn’t have the internet. Therefore, the statement, or one similar has been around a long time.

What made me think of famous quote happened the other day after I was giving an interview on the radio. The host made the comment asking what, and if, we can really believe “stuff” on the internet is true; thus questioning the validity of the most stories circulated throughout the internet and passed on in e-mail forwards. According to Ben Franklin, we shouldn’t believe anything on the radio since the messages coming through airwaves are spoken, thus heard.

While listening to the radio the other day, I caught a few seconds of Crown Financial Ministries talking about mortgages. The host stated mortgage requirements are getting lax again believes everyone should use a 20% down payment when getting the loan. Why 20%? He didn’t elaborate. I assume he is just repeating everything he has heard as well, because the answer was not detailed, just a quick opinion. Stating the obvious is an easy sell, and yes, talk shows are selling a product – the agenda. (Read Monkey Business in my book Barking With The Big Dogs and I’ll explain in detail. In addition, I’ll explain what is key about a 20% down payment – not just repeat what is typically spoken.)

Moving from the radio to the internet and speaking of e-mails, I get the Bleacher Report delivered via e-mail. One day while talking to a colleague of mine, he stated he didn’t like the Bleacher Report because it was a bunch of bloggers. “Bloggers are biased” he said. Okay, so are newspapers; otherwise, why would the newspaper endorse a candidate such as Bill White (candidate for Governor of Texas) as the Abilene Reporter News and their other affiliates did? They are biased for Bill White, not equally for Rick Perry. Furthermore, showing bias, I had a comment not published that was in direct response to a previous post on their website. Moreover, newspapers are aggregators of information just like the Bleacher Report. (An aggregator is a collection of items.)

The Bleacher Report collects and distributes sports stories from The Austin Statesman, The Dallas Morning News, ESPN, etc., and yes has bloggers too. The Abilene Reporter news collects stories from the Associated Press (AP) and has bloggers as well on their online site too. They post videos from other sources just as many websites do. So, what’s the difference? Nothing, just the agenda.

When reading the paper, checking out the latest story on the internet or listening to the radio, what we read and his is not always the complete truth, but it’s not all a bunch of lies either, and maybe , consists simply of partial truths.

The main thing when getting information from the internet as opposed to other sources is not to buy the hype – just about everyone, everywhere repeats what is commonly known and has their opinions about what is seen, read or heard thus tilting the information to fit some kind of agenda which promotes (either directly or indirectly) some business, whether the businesses are private sector companies or public agencies.

Here’s the thing though, and it may seem trivial, but both the show host and news writer either made misstatements or misprints, and I’ll explain in just a minute. I’m not hear to criticize either party, just simply to clarify and make a distinction. In reality the statements are probably close enough for government reporting and sounds good enough to the masses anyway.  In addition, a couple of important aspects are noted later as well.

However, to speak about the Fed and the misstatements, let’s talk about what it is and does looking at an excerpt from Barking With The Big Dogs…

“To begin though, what is the Federal Reserve? Is the “Fed” a government agency? Not exactly. Depending on which source you read, some people will say banks themselves set up and/or control the Federal Reserve. You can research President Woodrow Wilson and come up with your own conclusion. However, the Fed is setup as independent from both. The Fed has to operate within the laws and banks must oblige by the regulations set forth. The Fed does act in the interest of the banks, but for the economy as a whole as well. The Federal Reserve is more like the bank’s bank. In a nutshell, banks send excess money to the Federal Reserve to borrow from or lend to other banks when needed.

For banks to borrow from each other, the rate they receive is the Fed Funds rate. As described in summary by a former bank examiner, (who wishes to remain anonymous) and that I have had numerous conversations with, this individual said the “Fed funds rate” is a rate that banks lend and borrow amongst themselves. The rate is an overnight rate. Selling Fed funds is a method used for excess liquidity, but not long term. Banks would rather lend for longer terms rather than lending to other banks.

To continue with the examiner’s comments, he went on to say when banks look for sources of funds, they borrow from the Fed as a last resort, such as a liquidity issue. The only way the Fed will loan directly to a bank for a medium or long term is if the bank is in danger of closing its doors due to a liquidity crisis or some community catastrophe. A major event is the reason for the fed discount rate. The rate is also a longer-term loan, thus a higher rate. If a liquidity crisis becomes a system wide problem, then the U.S. Treasury enters the picture, not the Fed.

Then what is the U.S. Treasury and how does the Treasury fit into banking? The Treasury supervises the banking institutions. The Treasury manages the country’s money, or finances, collects taxes and pays the bills. The Treasury produces currency (dollars) and coins. The Treasury also advises on economic, tax and trade policy. (By the way, Congress, not the President, actually controls the money. The President makes requests.) The Treasury also enforces tax laws.

When the Federal Government needs more money, Congress raises taxes. To raise money, the government also borrows in the form of “Treasuries” – T-bills, notes, bonds and inflation protected securities. For more money, the Treasury prints more money. So how do these actions by the Treasury affect you and me?

Very simple, our taxes go up and the value of the dollar declines.” (Chapter 35 Interest Rates Aren’t Sexy)

Interest rates at the Fed are low because of supply. Borrowing is down and saving is up. Big businesses and banks are sitting on huge amounts of cash in deposits.

Having huge amounts of cash as well as the Treasury printing more money may keep borrowing rates low for a long time, and our investments in savings accounts and CD rates too!

Many times saying all debt is dumb is easy advice to give. For example, let me ask the question, “do you like to pay interest to someone else, or do you want to save and keep the dollars for yourself?” From a salesman’s perspective, the previous question was a leading question. The answer was already known. Everyone wants to keep money versus giving the funds to someone else. Therefore, telling people debt is stupid or dumb is easy advice to give (or sell). No other explanations are necessary.

Well, I’m not interested in stopping here, some explanation is required for true financial knowledge instead of simply rehashing the obvious mass amount of common knowledge already in existence.

Read the entire article below. It’s short, sweet and easy to read…

Is it smart to pay 10% interest on inventory?