Debt: good or bad?

[Cornish Steve]

At business school, I was taught that debt is good. It provides the cash needed to start and grow a business. On the other hand, I've happened to notice that companies with no long-term debt are among the best performers on the stock exchange.

I'd be interested to learn everyone's experience with debt. Is it something to expect or to avoid? What is your short-term versus long-term view of debt?

In our case, we have been able to raise the cash needed to start our business from personal savings and by using zero percent credit cards. How did others find the cash needed to start a business?

 

[Rob]

Used correctly debt can be a force for good within a business; used incorrectly then it can bring a business down.

Some examples of good debt:

- using overdrafts to fund working capital requirements i.e. to effectively bridge the gap between supplies having to be paid for and debtor money collected in
- Loans for equipment used to grow the business via increased stock holdings
- Loans to purchase property to house the business (though if you are a follower of Rich Dad philosophy he’d see this as bad debt)

Some examples of bad debt:

- using borrowing to fund a start-up or growth with no matching contribution from the promoters
- buying medium to long-term assets on overdraft (this restricts the business’ ability to fund day-to-day requirements
- using borrowed money to fund overtrading

It’s all a question of balance. My view is that if you can start up your business with no borrowed money then you are off on the right foot – who needs the pressure of loan repayments looming when you are still seeking customers? If you do have to borrow keep the ratio to the amount of cash you are putting in as low as possible.

For a well established business, if used corrected borrowed funds can help leverage the business’ own resources so producing a growth rate far higher than if you relied on internally generated funds.

Problems start when businesses say they need to borrow funds to help out with cash flow when in reality the business is loss making and no one realises it.

Bit of a shameless plug coming up but within the next week I’ll be launching my latest e-book ‘The Secrets of Getting Your Bank Manager to Say Yes!’. I only mention it because in sending out review copies I am getting a number of people saying that small business owners need this information. Too many business people approach Banks without the faintest clue of what to do and end up getting in trouble. I’ve been a Bank Manager behind this desk so this book is years of first hand knowledge and experience!

In summary – is debt good or bad? Depends on your approach it and how you handle it!

 

[multilingual]

Couldn't agree more with the above comments.

Coming initially from a Plant Hire business where high finance and high debt are part and parcel of the industry (Unless you have a spare half millon doing nothing) I can tell you that it is all too easy to become dependant on the borrowed money.

In the end I was really working for the banks, not myself. I decided to sell up when I started to define success as 'being able to make a finance payment without needing to ask the bank for a higher overdraft'.

I structured it wrong from the early days: Orders were coming in on a regular basis and I grew the business far too quickly using borrowed money. Would have been better to take a slower more controlled growth using re-invested profits, but I was young and ambitious.

Now I am 15 years older and still as ambitious, but the current business runs debt free and has done from day one. This time we took a long term view and it is paying off.

That's my little story.



JB

 

[Ian J]

The amount of debt that is desirable will depend on the type of business. It would be difficult to start a printing company for example without debt as the fixed assets will have to be purchased and most commercial printers will be aware that their corporate customers pay their print bills last of all which in turn will mean the printer will be slow in paying for raw materials.

 

I started up by funding the business initially with my own cash from my full time job. I have now built up a resonable quantity of stock and eventually the stock turnover will pay me back for my investment and i will only buy new stock as funds come in from sales. I will therefore not get into any heavy debt with suppliers. It is very tempting to just purchase loads of stuff and hope it sells but if it doesn't, you still have too pay your supplier at the end of the month, hence my buy it as i need it policy.