Spend much time in the business world, and you’ll find that lending, credit and financing permeate the capitalist system. People take out loans to start new businesses; borrow money to finance the purchase of large pieces of equipment; take possession of inventory on terms that allow them to pay for it later; and use debt to “leverage” their spending power in order to expand their businesses more quickly. There’s an entire industry devoted to business credit. So if you’re a business owner, the question you must ask yourself is this: Is borrowing right for you?
In this series on Business Wisdom, we’ve been examining how God’s Master Plan for your personal finances also applies to your business finances. As the old saying goes, “what’s good for the goose is good for the gander.” In the same vein, what’s good (or bad) for your personal finances is also good (or bad) for your corporate finances. And that leads us to take a pretty cautious view of business debt.
We’ve been pretty tough on debt and borrowing as a personal financial strategy. According to the Bible, debt puts us in a position of financial slavery. And though our society tells us lots of myths about debt and borrowing, math tells us another story: You’re almost always better off paying cash for something later than borrowing money to buy it now. With only a few exceptions (such as home mortgages), debt is a bad plan for your personal finances.
That brings us back to business. As a general rule, we believe that debt is as dangerous to business owners as it is to families. Sure, you may see business owners all around you borrowing money, and those decisions may seem to help them grow. But the interest they pay on those loans costs them a lot of money in the long run. And debt creates risk that can crush a business during difficult times.
Why is debt bad for businesses? For all the same reasons that it’s bad for individuals. Businesses that rely on credit to get by from month to month are poorly disciplined, and are likely kicking the reality of their financial problems down the road every time they borrow a little more. Debt allows a business owner to skirt cash-flow problems for a time, but it just digs him deeper into a hole for the long-term.
Debt also costs business owners a lot of money. Borrowing, of course, isn’t free. Just like borrowing increases the cost of a car over the length of time that you own it, borrowing increases the cost of whatever piece of equipment or service that you buy for your business on credit. Over time, that money that you spend making interest payments could be re-invested into the business to help you grow it in a fundamentally sound way. Or you could take it home as hard-earned profit. Either way, borrowing costs your business unnecessary interest payments.
Lastly, borrowing is dangerous for businesses because it puts them in a precarious position of risk. Difficult times happen in business — we can’t always predict when an economic hiccup or some other event will take a chunk out of our revenues. When those tough times come, we often have to hunker down and ride out the storms. If you don’t owe anyone any money, that can be fairly easy to do. But businesses with large debt loads have to continue to make payments on those debts, whether they’re in the midst of a tough market or not. Very often, the weight of those interest payments can push a struggling business over the edge. A debt-free business can emerge from a difficult time and continue to operate on the other side. But tough times sink debt-laden businesses, forcing them into bankruptcy and ruining a lot of lives.
There are certain situations in which it might make sense for businesses to borrow money, and we’ll investigate those in the next entry in this series. But for now, remember this: Debt isn’t a good idea for your personal finances, and it’s not a good idea for your business either. Steer clear of debt, and you’ll keep your company on solid ground.
Photo by Alan Cleaver. Used under Creative Commons License.