Be aware that if you are the manufacturer and distributor of your product, you will be responsible for providing product liability insurance to the retailers who sell the product. All retail products, no matter how innocuous they appear to be, must carry product liability insurance.
If you are building a business around your invention, keep in mind that it is your responsibility to enforce your patent. If you should find your product infringed this could be a significant expense. Many independent inventors choose to license their products for this reason alone. They know that they would never have the financial resources to sue for infringement.
Large companies also know that small independent product developers are not likely to have the funds to force them to stop if they choose to infringe. This makes it more likely that a large company might consider it worth the relatively small risk that an independent inventor could make them stop producing and selling the inventor’s patent protected product.
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If you currently do not have a business and it is your desire to build a business around your invention, you can do it, but it becomes a much more risky proposition. In the example above, the business owner can lose some money if the product fails, but he is not likely to lose the entire business unless he has risked the company’s stability on the success of that product.
If you choose to build an entire business around a new product, not only will you need a substantial amount of start up capital, including enough to survive until the company becomes self-sustaining, you will need to be virtually certain of the success of the product. There are some astounding success stories of people who have built profitable businesses around a single product. It can happen. But, the odds against huge successes with businesses built around a single product seem to be getting steeper. One important reason is that the buyers for the major retailers will not even allow single-product vendors an appointment to show their product to them.
If you have only one product to sell to a major retail chain, you are not likely to be given that opportunity, no matter how great your product may be. While the retail stores are made to look cheerful with bright colors, bright lighting and background music to enhance the shopping experience, to the retailer it is very serious business and each inch of shelf space is allotted to a particular manufacturer in a map of the store, known as a planogram.
Getting your product on that planogram is not an easy task if you have but one product.
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Investors also rely on society. Stable economic conditions are important for investors. Investing concerns the value of currency. Inflation, deflation, supply and demand: All are part of the investment scene. Ancient savers relied on the utility of the product saved, not the currency value of the paper interest in another’s actions or productivity. However, investors’ reactions to their relationship with their investees are much more powerful than their reactions to economic conditions.
For a fee, many parties facilitate the transfer of investment capital to investees. Stockbrokers, Realtors, bankers, money managers, mutual funds, newsletter writers, and other financial professionals siphon off pieces of investment capital. While investors seek to make high returns with little or no work, financial professionals seek to obtain high wages with little notice. This relationship is the source of many troubling emotions.
Investing involves small segments of society: businesses, individual farms, buildings, and entrepreneurs. Only recently, with the advent of index funds, has investing concerned the whole of a large market: the stock market. Index funds are mutual funds that buy shares in every stock in a given segment of the market. Buying index funds, you can buy a piece of the whole stock market. Still, the stock market is only one segment of society, though currently a large segment.
The investor trusts the investee. When this trust is broken, strong emotions are unleashed. Utility stockholders are furious when a utility cuts or
eliminates its dividend. When a tenant defaults on a lease and forces a property into foreclosure, the property owner has a wide range of emotions triggered by the breach of trust. Some vow never to own real estate again.
Sometimes the investment exceeds expectations. Wal-Mart investors saw their small regional chain become the largest retailer in the world. Berkshire Hathaway went from a shell company to one of the world’s largest corporations. Success triggers grandiosity in some, frivolity in others.
Many successful investors are disoriented and unhappy. However, faith is also a part of investing. The borrower, tenant, or business owner believes the application of science and technology to business practices will produce more than the sum of capital and labor, thus enabling him to pay the rent, interest, dividends, or capital appreciation plus enough for his own savings. Productivity, technology, and efficiency are the creed of investors.
Investment relationships are not identical to romantic, family, and social relationships solely among people. Though people, often with conflicting interests, are involved in investment relationships, the primary relationship is between the individual and an inanimate object: money. At first, it may seem odd that a relationship between a person and an inanimate object could be dysfunctional. In fact, our society is saturated with such dysfunctional relationships.
It is estimated that 10 percent to 15 percent of the U.S. population is alcoholic; essentially more than 30 million Americans have a life threatening dysfunctional relationship to an inanimate object: alcohol. One out of every three adult Americans are obese, based on their dysfunctional relationship to food. Sixty million American families have larger credit card debt than they can afford. Their relationship to material goods is dysfunctional.
In fact, consumerism dysfunction has reached new heights. Compulsive shopping is portrayed in the media as fun, not as an illness. Yet in the booming economy with a roaring stock market of the late 1990s, the number of personal bankruptcies had never been higher: 331,000 filed for bankruptcy in 1980; 413,000 in 1985; 783,000 in 1990; 927,000 in 1995; and more than 1,300,000 filed in 2000. In recent years, Americans as a whole have spent 1 percent more than they earn.
Let’s look at another example. Sally is carrying a $10,000 balance on her credit card. Sally’s monthly minimum payment is 2% of the balance, or $200, and the interest rate on the card is 18% annually.
If Sally makes just the minimum payment each month, it will take her 57.5 years to pay off her balance! Not only that, the $10,000 she put on the credit card will have cost her $33,930 by the time she gets it paid off.
But let’s say Sally always makes her minimum payment, plus an extra $100, or $300 a month. In this case, it will take Sally just under 7 years, instead of 57.5 years, to eliminate this credit card debt. In addition, her $10,000 that she spent on the credit card will only end up costing her $16,000. That’s a savings of over $17,000, which could have been used to eliminate other debts sooner.
Keep in mind as well that this example used a credit card that is charging 18%. With credit cards that charge higher rates (30%+) and things like payday loans, you can spend the rest of your life trying to get caught up. In either case, you’ve got to take drastic action to cut your debt now.
In the case of hybrid ARMs, both the purchase and rate and term refinance (no cash out) risk multipliers are greater than 1.0. At first blush, this seems counterintuitive, especially in the case of the purchase loan, which is generally perceived to be stronger. However, we believe the findings are due to the following:
Purchase borrowers may be first-time borrowers or “stretching” to purchase their home. In addition, they may employ a second lien loan to finance their down payment. In either case, they may be overleveraged.
In addition, purchase borrowers have, by definition, no time in property, and this may influence the propensity to default.
Rate and term borrowers are not extracting equity but rather seeking to lower monthly payments. The reluctance to extract equity or the absence of equity available for extraction may signal a weaker borrower relative to a cash-out refinance.
Fixed rate and term refinance default risk is less than refinance cash out or purchase. This borrower is most likely reducing rate and/or extending term. This, in turn, lowers the borrowers and reduces the probability of default.
Overcollateralization is the excess of the mortgage pool balance over the certificate balance and acts as internally generated credit support. Excess spread is used to accelerate the amortization of the outstanding certificate’s principal balance to a level lower than the mortgage pool balance.
Overcollateralization can either be allowed to build over time or be fully funded at closing. If the OC is built over time, excess spread is used to accelerate the paydown of the AAA classes until the target OC amount is achieved. The target OC amount is usually achieved in the early months of the transaction’s life. Conversely, if the OC is fully funded at closing, then excess spread is used to maintain the OC amount. The target OC amount is generally established as a percentage of the original principal balance. The required OC amount varies depending on the underlying collateral composition, structured used and the level of spreads on the liabilities (bonds) issued.
An overcollateralized transaction can sustain losses equal to the amount of current available excess spread and overcollateralization before incurring principal writedowns in the capital structure. For example, assume the transaction structure and a target OC building to 1.3%. Once cumulative losses exceed the OC amount, and if excess spread is insufficient to cover losses in a given period, then subordinated bond investors will incur principal losses.