Money Management
November 11, 2024
It is money that can help achieve your financial goals and build wealth. But this dream is dashed when we do not, or have little money.
Well, we can put that aside and look for ways you can get money to build wealth and one of these is using other people’s money (OPM).
Perhaps you have borrowed money from a friend, family member, Chama, or credit service provider. This money belongs to someone else and you can use it to create your own source of income or wealth.
The only thing that matters when we borrow from other people is the purpose – what do you subject the money to after borrowing?
In this article, we will highlight various ways to employ and use OPM to build your own wealth.
Other people’s money (OPM) refers to leveraging finances outside your pockets to increase your net worth. It refers to borrowed capital that is used to increase the potential returns.
The forms of OPM include bank loans, investors, family and friends, venture capital and angel investors, crowdfunding, grants and mergers among others.
There are no traditional financing prompts to follow, such as underwriting the property, inspections, and appraisals, and qualifying as a borrower.
The use of OPM differs greatly from self-financing. Self-financing involves using your own capital; savings, home equity, stocks, bonds, and credit cards to fund a project or business.
However, when you have limited liquidity you may not be able to finance the project. Self-financing is risky and sometimes impossible if you do not have the requisite amount to get your idea off the ground.
Other people’s money spreads out financial risks; if you take Ksh400K from a friend and add Ksh100K to invest in a project that in turn gives you 20% profit, you will earn Ksh600K. if the business makes a 20% loss, you will still be at the safe side with Ksh400K.
It also increases your reach and ability to make bigger impacts in your financial goals.
You probably have a business idea or a financial plan but your self-finance is limited. One good option to leverage and maximize returns is the use of other people’s money. Here are ways you can build wealth using OPM:
If you are thinking of a startup, consider leveraging OPM to initiate your business growth and position in the market. When you use other people’s money, you have the ability to expand your operations and track your progress.
But the question is, how can you get OPM to grow your business or achieve your financial goals towards wealth?
There are several options to get other people’s money;
Merging your business with another company is a great way to fund your growth. You will be able to bring resources like marketing, customers, and clients together and increase your returns.
Real estate investment can help you grow wealth using other people’s money. Apply for a rental property loan to build rental houses. Once your project is complete, you start paying off the loan with money from tenants and keeping the profit to some other investments. The mortgage loan you used to build the rentals and tenant rent are OPM you use to build your wealth.
When you have a viable business idea, there are people who are ready to bring in capital and leave the rest of the management to others. These are silent partners. Your goal is to convince the silent partner to bring money to get the business running as you put in expertise. This is money from other people as you benefit from the returns to build your own wealth.
Crowdfunding is a digital fundraising opportunity that allows entrepreneurs to gain support from the masses to run their business idea.
The best fundraising is the reward-based crowdfunding which enables you to pitch for a business idea by promising future rewards to get support or investors. For example, you can pitch for a business idea with a 15% profit reward back to crowdfunders, or give out free products and services.
Credit cards offer a variety of opportunities to create wealth using other people’s money. The cards come with an interest-free period (between 30 and 55 days in Kenya) that allows you to pay for goods and services at zero interest.
This means you can pay for goods in advance, using the card issuer cash, and payback as a credit bill.
For example, you receive Valentine’s Day orders that will cost you Ksh100,000 to process but you do not have that cash in hand because some of your debtors are yet to pay you.
You expect your debtors to clear their outstanding amounts by March 10 according to your contractual agreements.
You could take a mobile loan or invoice discounting business loan that attracts an interest plus processing and insurance fees to fulfill this order and make the profit you have projected.
Or you could take a credit card that allows you to repay the Ksh100,000 within up to 55 days (depending on the card issuer and card type) with zero interest.
Credit cards can be a great, cheap way of smoothening business operations during periods of low cash flow as compared to personal loans as long as you are able to repay your debt within the interest-free period.
Read On>> 8 Advantages of Credit Cards You Should Know About
Grants are funds you get from either a government, organization, or an individual for financial assistance. The advantage of a grant is that you do not need to pay it back. You can use these grants to promote your business and increase your income. To earn a grant, develop a strong business plan showing how the fund will be used and the goals of your business.
Although using other people’s money has proved to be the best strategy to achieve your financial goals, it also has its risks.
When you use OPM to grow and expand your business, you pose the risk of losing control of the business. Angel investors finance your business after you give them a stake of your business. This means they become shareholders, with a say in the decision making and running of the business.
Your financial plan gets a different direction when an investor brings in different control measures. For instance, if you had an idea to expand your products and services and meet up customer needs, and an investor comes in with a different idea that deviates from customer centered approach.
Getting a loan from a financial institution to finance your business comes at a cost. The interest the loan accumulates may be high and increase your debts, especially when your business makes a loss. For instance, the mortgage loan repayment may be expensive when your rentals are not yet fully occupied.
Using other people’s money to finance your business can increase the risk of bankruptcy as a result of financial distress. Especially when the business is not yet in the market, you may find it difficult to pay creditors.
OPM also exposes an individual to the risk of a damaged relationship among family members and friends. When you borrow money from a friend or relative promising to pay back after your business return, you expose yourself to the risk of losing their trust when the returns are negative.
Funding your financial growth can be achieved with self-financing but it will gain a significant success when you leverage other people’s money. All you need to succeed in making wealth using OPM is getting the right kind of money from the right kind of people to support your business. You also need to set a goal and vision to fast track your business plan and increase your returns.
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