How entrepreneurs make their money

Most times, people are either servicing debt or struggling to get out of a debt trap.

It depresses to keep on sinking deeper into debts, but there are clever entrepreneurs, who, despite having money, make money out of debts.

It sounds weird but true. Let’s look at some of these ways.

Trade with debts

From a business perspective, this may not sound true if you are venturing into business for the first time. You may not know if the business will pick up incase you had borrowed heavily to jumpstart it. But there are businesses that can thrive in debt.

For example, China can be called the world’s factory because it produces almost everything that it exports to every corner of the globe.

If you have been a loyal client, say to a particular factory, such that they have trust in you, you may borrow their products and repay when you have cleared the stock.

Here, the factory does production and you do marketing. You get the money by pocketing everything above what you agree with the factory.

Say the factory ships you goods worth Sh1 million, and you sell at Sh1.4 million - making a profit without touching your own money.

Forex

International trade is made possible through currency trading. For example, you are in the Democratic Republic of Congo and you want to pay the locals there in dollars but they insist on being paid in their local currency. You look where you can purchase local currency.

It would make an interesting observation if the local currency had lost ground against the dollar or the US Treasury had raised interest rates limiting the dollar supply. If you are in the forex business and can predict which currencies will rise or fall, you are bound to make lots of money.

Unlike other money markets, forex is different. For every $100 (Sh11,400) traded, you can borrow more. A one per cent profit margin means you can make a tidy sum in this trade.

Renovating and reselling rundown properties

Not all those venturing into real estate make a killing but there are people who benefit.

You can buy a rundown property, do renovations and sell it at a profit. You can apply for a loan if you are planning to buy the house off a mortgage plan. After renovating, the price of the house appreciates, say from Sh2 million to Sh7 million, you then put it on sale and pay off the mortgage.

Hedge funds

Hedge fund investors try to make money when companies fall or go bankrupt. But how can you make money with debts here?

The idea is to hope that the stocks of a listed company decline. Say you buy that stock for Sh10,000 and the prices double overnight? [Paul Kariuki]