- THE MAGAZINE
I’ll admit it - I’m super confused. On one hand many carpet cleaners tell me they shun business debt like the plague and never borrow money to expand their business or to become more efficient.
Others tell me they will sometimes borrow prudently. Up till now I’ve always been in the second group - borrowing carefully to finance my company. For example, I borrowed around $30,000 to start my company.
So for those who are totally opposed to prudent start-up financing I would ask: “How do they have the means for the initial purchase of equipment, cash flow crunches for employees and poor receivable collections, growth funding and basic things that require cash that you expect to make from the purchase.”
Am I mistaken in my stance? What’s wrong with prudent business borrowing?
-Super Confused in Santa Fe, NM
Here’s the deal, Super. I hate and despise consumer debt! My wife and I never (and I do mean never!) borrowed money for consumer goodies. We furnished our first apartment with hand-me-downs and garage sale stuff. Over the years we replaced our garage sale furniture with better chosen antiques, usually purchased at (you guessed it!)... garage sales.
So now let’s talk credit cards. We use credit cards in our family but only for their convenience. Our credit cards get paid off every month without fail. (The interest credit card companies charge now in our current low interest rate environment would make the Mafia proud!)
However, when it comes to “borrowing money to make more money” in your business ... why not? If the proposed debt will more than pay for itself and if you will make more money and are convinced you will pay it back… why not? I borrowed lots of money for truckmounts, equipment, etc. and paid it all back with interest and made tons of profit with these business assets while I was paying them off!
There are very few successful companies that don't borrow to expand. It takes such a long time to acquire the capital needed for most expansions. And while you are (painfully) playing the waiting game socking away money, you likely could be more than paying back the initial cost of the equipment. Can you say “lost opportunities” here?
Let's face it - we're entrepreneurs - we take risks! We are in business for ourselves for a reason. We want to do it “our way.” So if “your way” means wanting to be totally and completely debt-free, more power to you. It will just take you much longer to become totally financially independent. Your choice and more power to these totally debt free folks!
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For me, conservative borrowing simply wasn’t a problem. I borrowed conservatively when needed and always paid it back. If there was a business expansion that I was convinced would far out-produce the expense of a loan – I would go for it.
For example, I bought my warehouse complex in 1984 with borrowed money (at 13% interest for seven years! OUCH!) Yet I paid the note off in less than five years and my total outlay still was less than I would have paid in rent. Today the property is worth over five times what I paid for it and is free and clear. Even better, it is rented profitably and provides a very nice monthly cash flow. None of this would have happened without prudent business borrowing!
NOTE: One emotional stumbling stone for many on business loans is virtually all banks will want you to guarantee the loan personally. This never bothered me because I was absolutely sure I could easily pay it back anyway. But let’s cut to the chase here…
At the end of the day borrowing money is more of an emotional decision than a financial one. If you aren't going to be able to sleep with prudent business debt hanging over your head, then don't do it. For me, I would not have been able to sleep thinking about all the lost opportunities I was missing without the borrowed money!
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