What is the burden of an internally financed debt? and Rogers City Mayor Beach Hall Testifies Before Michigan Senate Finance Committee

What is the burden of an internally financed debt?

What is the burden of an internally financed debt?


Finance best answer:

Answer by Matt M
The burden is the fact that it could be earning you more money elsewhere.

Let's give an example: Assume you have the option to buy a car at 1.9% financing or paying for it outright. Which would you do?

Of course you would finance it at 1.9%, and invest the money you would have paid for the car in something that will earn you more money (maybe a CD @ 3.5% or something).

Using other peoples money (i.e. the banks) increases leverage and your return on capital, assuming your return on cash is greater than the rate your borrowing at. But remember, borrowing also increases risk, especially if you don't have the funds to pay for it should $ hit hit the fan.

So basically, the burden of internally financed debt is the opportunity cost (interest rate) you could earn elsewhere by financing it with someone else's money.

Hope this helps.

Finance

Rogers City Mayor Beach Hall Testifies Before Michigan Senate Finance Committee


Image by Michigan Municipal League (MML)
The Michigan Senate Finance committee Thusday, Nov. 4, 2010 took testimony on a package of bills that the League has been pushing for a couple of years. The League's Summer Minnick, Director of State Affairs for the League, testified along with Shea Charles, City Manager of Howell and Chair of the League's Municipal Finance committee as well as Beach Hall, Mayor of Rogers City on the importance of these bills. The bills, HBs 5550 - 5554 would, generally speaking, allow local communities the opportunity to refinance existing non-voted debt in order to better handle challenging fiscal times. Many communties have expressed an interest in these bills and the committee hearing is a great step forward in this process. The bills have already passed the House. There was a substitute adopted that made minor changes to the approval process and we now are optimistic that the bills will be passed at the next Senate Finance committee next week. This is one of the League's lame duck priorities and we are hopeful we can get the legislature to provide some tools for struggling municipalities before the end of this session! For more about the League and what we do go to mml.org. For additional blog posts by Summer Minnick and other League staff go here: www.mml.org/advocacy/inside208

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