If managed carefully, debt can be your friend. If not, debt will become the enemy of your business. Do your best to use debt sparingly as you grow your business.

Using debt is not immoral or illegal. We use it for mortgages, major purchases, tuition, and even incidental shopping. But the key is to undertake debt that you’re certain you can repay. Your monthly mortgage payments are accommodated in your cash flow (they had better be!). The same for car payments, or even restaurant meals. One of the great problems in these times is that using debt for college tuition was done without a reasonable certainty of paying it back. If you are a philosophy or European literature major, you’re probably not going to get a job after graduation that can easily pay back $300,000 of debt. You can go to a less expensive school or change your major and focus on a different career. But you can’t incur $300,000 of debt if you know you’re going to be earning only $50,000 annually, unless you intend to live in your parents’ basement or rob a bank.

What is the biggest problem with borrowing money? You have to pay it back! That’s an old joke I was taught when I worked as a corporate banker. There’s truth to it!

We’ve all heard about people maxing out their credit cards to pay other credit cards each month. But debt entails interest (“vigorish” in the vernacular) and that keeps growing. Look at the required legal disclaimer on your credit card bills: If you make only the minimum payment per month on, say, $18,000, you’ll be paying it for 20 years and wind up paying $54,000 over that time period.

That’s no way to stay fiscally prudent.
Fiscal Finesse
The idea is not to avoid debt, but to use it wisely and prudently with the intent of paying it off with a clear and short-term plan.

People generally don’t pay off mortgages quickly, but they do accommodate the payments in their cash flow, can generally deduct the interest from their taxes, and own an appreciating asset through that investment.

Your business is no different. Use debt wisely and judiciously in order to grow, but don’t allow it to use you.

Another joke I was taught in banking: No one ever went out of business from having too much debt. It was the inability to service that debt that caused their demise. That’s like saying that it’s not the fall from a tall building that kills you, it’s the sudden stop!

The key consideration about debt is that it has to be paid off, usually with interest and even penalties. A great many students thought the government was going to erase their student debt, but they were wrong. Even debt in a family that’s “forgiven” can create ill will and resentment. And that debt didn’t disappear, someone else paid it off.

Borrow for the short-term, e.g., to hire a new salesperson who will be productive short-term and enable you to quickly pay back the loan, or to improve your technology so that customers can order online faster and in greater quantities.

Don’t borrow for ego or “show.” If customers don’t come to you, then you don’t need fancy offices, furniture, or artwork. (If you can afford these in the normal cash flow of a successful enterprise, fine.) Don’t borrow for “safety.” Even if you put the money in the bank “in case you need it,” you’re still paying interest on it and your credit score will reflect the outstanding debt, which could hurt your future borrowing and interest rates.

Debt is often alluringly simple. Credit cards inform you of your cash available to borrow. Shady operations offer “instant credit” (often at confiscatory rates). Use debt proactively, not out of desperation.

Finally, a banker will always lend you his umbrella when it is sunny outside. When you need a loan, they’re very hard to get. When you don’t need a loan, banks (and other financial institutions) line up with tantalizing offers.

These jokes are actually lessons in disguise. You spend all of this time and endure all of this stress to build your business. Imagine that you end up losing your business because you made a mistake somewhere or something unexpected happened (see COVID-19) that caused you to default on your bank debt.

The people and organizations which made it best through COVID were those which had cash. Assets didn’t have to be sold and loans didn’t have to be sought. There was hard cash, which went a long way.”
(Manny Skevofilax is a consultant, speaker, and author who helps business owners make more money by successfully navigating the challenges of growing their businesses profitably.This excerpt is from his new book, Ultimate Profit Management: Maximizing Profit as You Grow Your Business.)