Is business debt a bad thing?
The question every business owner will face at least once. The answer however is a little more complex. I know what it’s like to get to the point where you are not sure how you are going to make payroll, pay the rent, insurance or any other business bill and when you are in business for a while banks are going to give you credit if you personally guarantee it. If it’s a business debt do everything in your power to fight from co-signing even if it means not borrowing the money. There are many companies like Fund and Grow that specialize in business lines at low interest with no personal guarantee. Be careful, borrowing is easy, paying it back never is.
But let’s get back to the question.
Is business debt a bad thing? The answer, it depends.
The one thing that will sink any business is too much debt. I had a business that filed chapter 11 after 18 years in business. This was an extremely profitable company for many years. In those 18 years it had sales of over $100 million through all of its distributors and sales channels. I had helped a lot of people make a lot of money but I screwed up and borrowed too much money. The story is a great one and a worthwhile read and you can read about it in either of my books. There are so many lessons to learn from that experience that it made me the person I am today. I’m actually thankful it happened to me.
Just because I’m thankful doesn’t mean I ever want to go through that again and I sure as heck don’t want you to go through it but it changed me. I knew how to generate massive amounts of business with huge profits but I managed the profits poorly. And if you do the same your ship will sink.
So how much is too much debt? To answer, you need to understand there are two types of debt, long term debt and short term debt. Long term debt would be real estate, vehicles, equipment and various items with a fixed payment. Short term debt would be cash, credit cards and the like. Here’s my recommendation on short term debt. Any debt that you can’t be sure to pay off in 60 to 90 days is too much debt. So if you are working on a project and haven’t completed the project yet but you have to pay your bills, a credit line can carry you through if and only if you actually pay the thing off when you get paid. This is exactly where most people get it wrong, including me previously. You get paid and pay it off and isolate some of the profit before anything else gets paid. I discuss the isolation of profit, eliminating debt and building wealth in my post titled Money above what you owe to others.
As far as long term debt I have a pretty firm stance on the subject. Frankly I don’t think you should borrow money for furniture, vehicles, or any other item unless it’s the only way for you to make money and if it’s the only way to make your money than you borrow on the shortest term possible. When it’s paid off you don’t replace it with another newer item and borrow money to do it.
So if you need to purchase a work truck, buy the truck you can finance for 2 years instead of 5 years, even if the payment is higher. I don’t care if the 5 year payment comes with 0% interest its costing you money because the vehicle will lose 20% of its value in the first 1000 miles. I understand the mind justification we all like to do. We decide to get the more expensive new vehicle and pay for a longer term to get the lower payment.
This is how banks are keeping us broke.
The mind game you and I play on ourselves is the problem. So take the two year term. At the end of the term keep making the payment but make the payment to your reserve account. Now at the end of 48 months of owning this vehicle you can trade it in and use cash to pay the difference.
Each month you will continue to fund the reserve with the same payment you were making on the initial two year term and you will now have the ability to upgrade your vehicle every 2 or 3 years. That money will do you a lot better in your account gaining interest as opposed to you paying interest.
Delayed gratification isn’t waiting until you have the money to purchase something, it’s waiting to purchase something when you do have the money to make the purchase.
Look, business takes discipline and building wealth takes even more. Do you want to be a slave to money or do you want to master it? Only you can answer this question.
To your lifelong prosperity,
David Mulvaney