The problem with debt

The most stressful times in my life have revolved around money. Actually, it was the lack of money that was creating the stress. Both times the stress was due to money I had borrowed for different businesses. I learned the hard way that the Bible is right when it says “the borrower is slave to the lender.” Lenders are all smiles when you are signing the papers to borrow their money, and they remain easy to get along with as long as you’re paying them back on schedule. However, they’re not nearly as nice when you struggle to pay them.

One of things I’ve committed to as I’ve started my auction business is that there will be no debt. I rent a building when I schedule an auction. I’m driving an old van with over 200,000 miles on it. People tell me I need my own building and that I deserve to drive something better. I will one day… when I can pay cash for them.

Debt presumes upon the future. It assumes that business will always be good, the economy will remain strong, and that your goods or services will always be needed. Those are not good assumptions. If you doubt that you’ve already forgotten the lessons from 2008. When the economy tanked in 2008 people lost their jobs and homes, and money became really tight. Many small businesses closed when their income couldn’t keep up with their outgo, especially when much of that outgo was loan repayment.

Debt reduces your options. If a company carries a large debt load it may not be able to take advantage of great opportunities that come their way. There were several times I wanted to improve our business but couldn’t because we simply couldn’t afford to do so without incurring more debt. If we had not had the debt we already had, we probably could have made the improvements I wanted so it was impossible for me to justify going into even more debt. I just had to let those opportunities slip away.

Debt adds to your stress levels. Believe me, as our creditors were calling every week demanding payments I had a lot of sleepless nights. Rather than working on our business to improve it I was spending enormous amount of time trying to raise the money to pay our bills and remain open. That’s not a fun way to live.

Debt puts your personal financial future at risk. A small business owner is usually required by vendors and lenders to become personally responsible for any debt the business incurs. Our business was incorporated, but that didn’t protect me from personal responsibility for our debts. I had signed the contracts, and if the business couldn’t make the payments the creditors would come after me. They’ll come after you as well.

Debt may cause you to grow faster than you’re ready. As much as we want to see our businesses take off, we don’t want them to grow beyond our ability to manage them. Adding vehicles, personnel, equipment, and floor space may allow your business to grow, but that growth won’t be sustained if you’re not ready to properly manage it. As Dave Ramsey often tells his callers, you’re better off to be on the cover of Slow Company magazine than to be on the cover of Fast Company. If you limit your growth to what you can cash flow you’ll be more apt to be able to properly manage it.

Debt is a trap you want to avoid. When you are starting out you don’t need the newest, shiniest gadgets and equipment. Buy what you can with cash and rent whatever else you need. As your business grows so will your cash reserves. When that happens you can begin to upgrade your business with cash. The money you would be paying your creditors can go back into your business or your pocket. Either of those is better than giving it to your banker. You’ll enjoy greater freedom, sleep better at night, and enjoy much better relationships with your vendors and other suppliers.

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