I’m a believer in using debt to grow a business, as long as you have the short, medium, and long term cash flow to support it. Many business owners think debt is bad. I know. I have spoken to hundreds. Some of them avoid debt like the plague to the point that they’ll inhibit the growth of their business by not considering taking on any debt. Debt is not bad. Not in and of itself.
To ensure that you properly utilize debt to help you grow your business, you need to be able to assess your company’s financial health and position before taking on the debt, then monitor its health after. For this, you need to do the following:
- Track your operational cash flow on at least a weekly basis.
- Know what your monthly net income is, as well as your balance sheet positions.
- Have good projections for your future growth and performance that you adjust as needed at least every six months.
If you don’t do this, then I can understand why such a business owner would consider all debt to be bad.
I like the idea of bootstrapping because it requires you to focus on the company’s fundamentals and not grow more quickly than you can operationally (and financially) manage it. Too much equity too soon can result in you losing control of your company to the investors. Too much debt can result in losing control of your company to the debtholders…or in the demise of your company. Which is better? Neither, of course. Both can result in you losing money. (However, losing control to debtholders can ruin your personal credit if you have personal guarantees.)
The same way you take on personal debt to buy a house or car or pay for school, is the same way you approach business debt. Debt can be great. Excessive debt is not. Businesses have access to many other alternatives beyond traditional bank financing. I always ask, “What do you want to do with the money?” If you can partner to access resources that keep cash in your pocket, you should do so, and do so before pursuing debt. Then when you do utilize debt, your balance sheet and your company will be, and will remain, healthy as a result.