Lending Lessons From Warren Buffett
Every year, Warren Buffett, one of the wealthiest men in the world, and CEO of Berkshire Hathaway write his annual shareholders letter. The shareholders letter for 2011 talks about severy topics. One of those topics is lending.
During this speech, Mr. Buffett indicated operating a business or a even an individual family’s budget through the use of money that has been borrowed is really not a good idea. In fact, doing so could be extremely detrimental to the future success of that business of personal budget. During the report, Mr. Buffett was quoted as saying “When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices.” Essentially what he was saying was do you want to maintain a healthy credit score, so as to avoid have to find lenders for bad credit loans.
Existing on borrowed money is really unwise and can put a business in a situation that might result in the end of that business. This typically happens when businesses overextend themselves. It can also happen when money is borrowed via a variable rate loan, when interest rates are low and then those same rates increase. They payments that the business needs to make may be too difficult. If the company can not make its payments, the lender will likely call in the note and impact the business day-to-day operations.
Mr. Buffet also said, “Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed. Even a short absence of credit can bring a company to its knees. In September 2008, in fact, its overnight disappearance in many sectors of the economy came dangerously close to bringing our entire country to its knees.”
Do you best to run your small business and your personal life without the need for excessive financing. Keep your credit score high so if you ever do need to borrow money, you won’t need to get one of those loans for bad credit risks.