It’s no secret by now that I’m a huge Dave Ramsey fan. I listen to his radio show via podcast several days a week, and I’m always a bit shocked when someone calls in who is familiar with Dave’s Financial Peace principles, but yet they want to know whether or not they should go into debt for business purchases.
What makes us believe that business debt different is from personal debt, especially for entrepreneurs? Taking on debt is simply increasing risk, and the more debt you take on the more at-risk you place your company. If your company fails, who is the bank coming after? You!
If you want to start a business and don’t have the cash you need to get started, then you’re honestly not ready to open your business. Consider that every dollar you borrow is an extra dollar of risk you’re place upon your nascent business. Risk is always high in any new business venture, so why increase that risk exponentially by borrowing money that you might not be able to pay back if you don’t make the profits you’re hoping for?
A high number of startups fail within the first year—somewhere between 75-90%. Many of those business failed because of a combination of lack of profits and high overhead in the form of loans and lines of credit. When they failed, it left the former business owners in bondage to huge debts for years to come.
The sad fact is that some of these businesses could have survived and become profitable if only they hadn’t had monthly debt payments draining them on a regular basis.
So how can you get your business off the ground without shackling yourself with lots of debt? Here are some ideas.
- Rent until you can pay cash. Part of your business dream is to own your own building, but there’s no reason to jump into a mortgage right away. You shouldn’t even consider purchasing a building until you’ve had several months, or even years of profitability. As your business begins to turn a profit, start setting aside the money you’ll need to pay cash for your brick-and-mortar needs.
- Start small. Young couples starting out often go deep into debt because they want to live a lifestyle as good as or better than their parents right away, failing to recognize that it took their parents 20-30 years to get where they are. Don’t make the same mistake with your business and start comparing your little startup with the big boys down the street. Be wise, work hard, and give your business time to grow.
- Buy used. Who says you need to buy brand new equipment and furniture? It doesn’t matter what type of business you’re trying to start—from a bakery or an online startup—it’s almost certain you can find quality used equipment somewhere. Ask around, search on Craigslist, visit garage and estate sales. Above all, swallow your pride and save a ton of cash by avoiding pricey new equipment.
- Hire out special needs. Similar to renting versus buying a building, there are special needs that will periodically arise that will tempt you to make a major purchase. Consider whether you could simply outsource your special need instead of purchasing the equipment and goods necessary to get the job done in house. If it’s a recurring need, you can possibly save money in the long run by doing it yourself, but if your need is only periodic it’s probably worth it to hire the work out. As always, shop around and read reviews to get the highest quality for the best price.
- Work longer hours. Most entrepreneurs already know that launching and growing a startup necessitates working many hours beyond the standard 40-hour work week. If your business gets to the point where you think you may need to bring on additional staff, consider whether you might be better off working a bit longer yourself, or asking existing staff if anyone wants to pick up some extra work for additional income.
- Say no to credit. Learn to pay cash for everything. Just don’t allow yourself or your business to go down the road of accumulating debt.
- Don’t buy stuff you don’t need. This one should be a no-brainer, but sometimes our emotions and desires get the better of us and we make purchases that are simply devoid of logic. Whether it’s because we saw something “on sale” and told ourselves it’s a great deal, or we convince ourselves that buying some shiny new gadget is going to take our business to the next level, we need to be careful and determine if there’s a real need for our purchases. A simple rule of thumb is to let needs bubble up from within your business and then determine what you should purchase rather than buying something and figuring out after the fact how to justify that purchase as a need.
One possible exception to the above tips is a mortgage payment. Why? Because at least you are taking out a loan for an appreciable asset. However, you should still try to avoid it if possible, or at the least obtain a mortgage with the shortest term and pay it off as quickly as possible.
If you’re a business owner and have already accumulated debt, don’t despair. Financial Peace principles can still help you get your life and business back on track. Check out How the Debt Snowball Method Works.