Keep your personal assets at arm’s length from your business liabilities
About 5 years ago, I inherited a house as my share of my father’s property. I am in need of a loan for my business. I don’t want to sell the property as its value is much more than my current need. Is it better to take the loan by keeping that property as collateral or should I go for a business loan, by mortgaging business assets? I need to take a loan of Rs15 lakh. My annual turnover is a shade less than Rs2 crore and my ancestral property is worth Rs7 crore.
As a business principle, you should try to keep your personal assets at an arm’s length from your business assets and liabilities. This is simply due to the fact that all businesses have an inherent risk and in the event of a default, you risk losing your asset. And if there is a personal asset that is given as collateral, then the personal financial planning goes haywire. While the saying is easy, doing is not. And many a times, for various needs, you find business and personal assets getting merged together. Of course, there is always the right intention of getting the asset released in due course.
However, in your case, it is clear that your financial needs for business are limited in relation to your company’s turnover and at the same time you have all the means to keep business and personal assets separate, and that too quite comfortably. At the same time, the value of your personal property is much more than the business requirement, which clearly indicates that you need to go for a business loan. And as you mentioned that you have business assets, the verdict is clear—go for a business loan. In simple terms, you will not mortgage your personal property worth Rs7 crore for a loan of Rs15 lakh and instead opt for collateral of business property. Even better would be to use the business inventory or account receivables for business credit.
I am 25 years old working woman, and am getting married this month. Some are telling me that I should have only joint accounts with my to-be husband, some tell me that all the bank accounts should be separate and yet others tell me that there should be one joint account as well as separate accounts for both of us. From a financial point of view, what would be better?
There isn't one answer to this and there is nothing that can say this decision is right and wrong. It is not only about bank accounts, it is much more. Shall I share all my assets with my spouse? Do we merge all our assets and liabilities? Do I let remain my separate account or/and shall we go ahead and open a joint account? These questions and many more anxiety-laden thoughts cross the minds of all newlyweds. As you enter in a new relationship, it is all about ensuring your personal financial well-being is being secured. So how do you do it?
In the early years of married life, there could be some financial needs that are different for both of you. Maybe one wants to pursue higher education or it could also be about providing financial assistance to dependent parents. The idea is to respect each others’ needs and see how they can be combined together in one common pool.
Gradually, as you build trust, start sharing details of your assets and how these assets can contribute to your combined financial needs. Likewise, liabilities need to be planned and how you propose those to be paid off. Whether the other partner can support you in paying the loans early can be considered.
There can be instances where both of you have the same asset and/or financial instrument and it leads to duplication. It will be prudent that if possible the same gets merged, otherwise consider the merits of continuing with both of them. For example, medical insurance. If both of you have health insurance, does it make sense to merge one of the two? Check both the plans to see which is better and try opting for it.
At the same time, you need to protect your independence. As a couple you can decide whether you want to merge the accounts together where both of your incomes can get merged (in case both husband and wife are working) and then all expenses are met from the said account. The reason favouring a joint account is that in case one partner earns a higher income, it helps reduce the logic that the higher earner have more power in the relationship. This also facilitates in you taking a joint decision. Also, it may be prudent that initially you operate from your own independent accounts and over a period of time, with joint responsibilities and same financial needs, merge the accounts.
Surya Bhatia, managing partner, Asset Managers
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