Chances are, if your business is at all successful, you are going to be presented with the opportunity to borrow. At some point, you’ll need a larger space, more computers, more sophisticated software, and more equipment. You’ll have to buy raw materials, build your inventory and hire additional people.
Now, you are faced with the decision. Should you borrow? In this piece, I reflect on some of the negative consequences of business borrowing by examining the practical implication of debt and the lack of it.
There are significant advantages to being debt-free.
1. Freedom.
If you owe no one, you are free of the burden that debt brings. That freedom means you are free to respond to opportunities that come up. Almost every opportunity to do something new – new branch, new product, new employee, new customer – which could lead to growth requires an investment of time and money. If some of your time is devoted to paying off debt and you have little cash because you are working on someone else’s money, you cannot respond to those opportunities.
You may find yourself neglecting to build for the future because you are too busy paying off debts from the past.
But freedom is bigger than just business opportunities. The decision to take a major vacation for example, is a whole lot easier to make when you are debt-free than when you have payments to meet. Business debt impacts the family.
You may have an opportunity to make a major gift for a timely cause. Debt constrains that ability, whereas lack of debt provides you the freedom to do so.
There is also the emotional freedom that comes with no debt. Life is just easier and less stressful when you aren’t concerned about making the next payment.
2. Greater likelihood of your business surviving in a downturn.
When a business goes out of business, it is almost always because it can’t meet the required debt payments. That is the event which often signals the end. In the event of a serious business downturn, you can generally dramatically reduce your expenses. You can lay everyone off, sell off inventory, cancel subscriptions to name a few. But, if you can’t make your debt payments your business will be liquidated. On the other hand, if you have no debt, your business can survive as long as you are alive.
In my story of the impact of 9.11 terrorist attacks on my business, (below) if we had any debt going into that event the business would not have survived the reduction in cash flow which followed it.
3. Ability to negotiate better purchasing terms and prices.
Lack of debt allows you the opportunity to negotiate better prices. In a world where 30 and 60-day terms are routine, almost every vendor will extend a discount for a cash payment. These 2 – 3 percent discounts can dramatically impact your bottom line. If you have no debt, you may be able to use your cash to acquire the products and services you need at a discount.
4. You can invest and give at a greater rate.
If a portion of your cash flow is going to pay off debt, that portion is no longer available to invest in the business, nor to provide monetary gifts when you see a need. If you don’t have debt payments, then you are free to use the money as you see fit.
Consequences of Debt
There are very real, practical consequences to going into business debt. Of course, you have now increased your costs by adding another payment to the ledger. Since debt requires payments to be made in the future, in a sense you are counting on a future increase in cash flow to enable you to make those payments.
Regardless if those future increases happen, or not, you still have the emotional costs of an additional monthly bill about which to be concerned. Some portion of your time is now devoted to that debt. The time, money and emotional energy you devote to the debt is time, money and emotional energy that you do not have available for anything else.
This limits your ability to maneuver and take advantage of unforeseen opportunities to invest in your business. For example, a super-star potential employee may become available. But you can’t make him/her an offer because your cash is going towards the debt. Or, you may have the opportunity to acquire a new customer who requires a substantial investment in inventory or capacity. But you are unable to make that investment because of the debt payments. And, of course, the interest on the debt is now a new expense to the business and must be paid with increased cash flow.
Finally, the greater the amount of debt in your business, the greater the chance of going out of business. As I mentioned above, the event that triggers the bankruptcy or liquidation of almost every business is the inability to meet the debt payments. With no debt, you can almost always find a way to stay in business, even in the most difficult circumstances.
A case study
Before you take on any debt, consider all the other options first. I have found that debt is often a too-easy answer to a cash-flow problem. Borrowing can often prevent you from developing skills and capabilities that can be useful.
When the terrorist attacks of 9.11 hit, my speaking/training business crashed. No one wanted to travel, and no one wanted to invest in developing their salespeople. Every phone call was a cancellation. Literally, our business income vanished. However, my business was debt-free, and we had cash reserves. Despite not having any income, I was able to make payroll through the middle of November. I gave my staff the word, “November 15th is the last payday I can make. If nothing changes, I’m going to have to lay everyone off.”
I could have tapped into a line of credit or borrowed to meet payroll for another couple of months, hoping that things would change. That would have been the conventional wisdom, and the world’s easy solution. Instead, I gathered the troops together and said, “What can we do to produce income in the next 45 days?”
Realizing that people still needed training, but no one wanted to travel, we came up with the idea of phone seminars. At that time, there were no webinars, and phone seminars were occasionally offered at $200 – $300 each. We conceived the idea of TGIF&K – Thanks Goodness It’s Friday and Kahle. We set up a system so that people could order online, download a pdf file and make copies of, and then gather the sales force around a speaker phone and listen to me for an hour over lunch.
We offered this new product in December. Registrations began to come in with the fees pre-paid on a credit card. In the first seminar, we had over 125 paid sites and calculated that we reached over 700 salespeople. All the registrations were pre-paid, and the cash went directly into our account. A new product was launched, we laid no one off, and did not borrow a penny.
Not only that, but those seminars provided the basis for the next wave of growth in my business. I presented monthly TGIF & K seminars every month for the next eight years, and they were the basis for the next phase of expansion in the business. The phone seminars led, after the 9.11 panic had settled down, to live seminars. For the next ten years, those seminars were the backbone of the business and fueled it to levels we would not have considered possible before 9.11.
Here’s the point: If we had borrowed the money to meet payroll, we never would have developed the knowledge and skills necessary to develop the seminar business. The next phase of our business development would never have occurred had we taken the route of using debt to continue the status quo.
If you’d like to dig deeper into this issue, get “The Christian Guide to Financing Business Growth” – a free E-book here.
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