Should You Go Into Debt As a Small Business Owner?

Gene Marks

I usually don’t like to talk to people on planes, but for some reason I was drawn into a conversation recently with an older man sitting next to me on a flight to Florida. What he told me made me think.

His name is Charles and he’s the second generation owner of a scrap yard in Philadelphia. The yard employs more than a hundred people. I’m not sure how much you may know about the scrap business, but the essence of it is this: It’s all about the buy.

Scrap yards buy up anything containing steel, copper, or other commoditized metals and then “process” it into a form that can be sold on the open market. Scrap yard owners are constantly scavenging their areas for stuff to buy — usually from demolition sites and construction projects, although a non-insignificant amount of product comes from people wheeling stuff up to their door. They try to never say no.

It’s a tough business — extremely competitive and subject to market fluctuations. It can also be very profitable: If you buy low and sell high, there’s lots of money to be made. Charles knows this. He’s been doing it for 50 years. He’s been through recessions and boom times. He’s seen catastrophic free falls of prices and has been lucky enough to enjoy incredible run-ups. He took the business over from his father back in the 1960s and now his two sons are primed to take it over from him.

Yet all this time he ran his business, he abided by one rule: Take on no debt.

“I don’t believe in debt,” he said to me, sipping his drink. “If you can’t afford to expand from your own cash flow, then that’s that.” For five decades, Charles ran his business with an iron fist. He watched overhead, negotiated union wages, kept his head count low, and only bought equipment when he knew there was a “99% probability of a 100% return on investment.” Sure, he had to give up on some deals and pass on the occasional great buy. But, as he said: That’s that. Charles refused to find himself beholden to someone else.

Do you agree with his strategy? The answer is that there is no right answer.

There’s no denying that many successful businesses have been built because of financing. Most of our largest companies have issued some form of debt to allow themselves to buy other companies, invest in joint ventures, expand into other countries, or to finance working capital.

Debt enables the typical consumer to buy homes and cars and enjoy life. Some businesses — particularly seasonal ones — couldn’t survive without financing to get them through the leaner periods of the year. Bankers (of course!) will tell you that debt — so long as it’s serviceable and used wisely — can be a great thing for a business.

Whether or not you need to get financing is a function of your business, your needs, your industry, and your opportunities. By all means, don’t shy away from debt if you determine it will help you grow and profit. Debt can certainly be a great thing.

Then again — and always keep this in mind — no debt at all can be a greater thing. Charles — now napping peacefully in his seat beside me, on his way to spend a month with family at his vacation home in Boca Raton — will certainly remind you of that.

15 Responses to "Should You Go Into Debt As a Small Business Owner?"

    • michelle | May 14, 2018 at 12:30 pm

      Depends on the business you are in. Scrap is a deep cyclical, and debt becomes problematic. First of all, the time at which you need it, it will likely be very expensive. Then there is the timing of the recovery that will allow you to repay it. In businesses with more stable earnings, go for it.

    • David Haralambou | May 16, 2018 at 7:50 am

      Agreed, depends on your business. Only you know if taking on debt for an opportunity in the marketplace is worth the risk. Always assume the unexpected (natural disasters, fire, etc.) and make sure that you can still move forward and cover the debt. Many businesses are fine until the unexpected comes along and puts them in a financial hole they can not get out of.

    • Cynthia Collins | June 5, 2018 at 10:29 pm

      I think it’s like personal debt. Your house payment is an acceptable debt, as long as it doesn’t exceed 30% of your gross monthly income. And your total monthly debts don’t exceed 38% of your gross monthly income. You should be able to pay your A/P and payroll accounts on a monthly basis without using lines of credits to do so. I think it is ok to acquire credit debt, but I really try to do that plan based on paying that debt off within 12 months. I love low interest options and extended payment plans that are offered by our vendors. Credit cards are definitely to be paid off at the end of the month, just like personal cards-and only use cards that you can earn points or cash back!

    • Thomas Kane | June 6, 2018 at 7:48 am

      Good morning
      I have been in business since 1984. When I negotiated a buy out of a printing company using his funds
      Since then I took into to much debt over the course of years. Some just to stay afloat. Then 2008 hit me hard I lost my building and was able to save the business by the grace oh God
      I’m
      2012 I filed ch13 on 35000 I’m debt to save my home but loose the Building due to a take over of my Bsnk
      Fast forward to 2016. By Gods grace I obtained a loan to buy another business which did blue prints and had an excellent daily cash flow
      This was the first time I actually took in debt that made since.
      Today 2o18 I paid that 6.5 rate off with a new loan @ 4% saving me 1200 a month I paid the loan down by 43000 in one year
      The business has tripled in sakes with both merging and I have rebranded and became a AlphaGraphics part of a great franchise internationally know service provide in printing, marketing. Etc
      I have added new high tech equipment and plan on
      Paying off that loan of 160000 in
      Give years or less

      Thank you for your blogs
      Thomas G kane

      Lol age 65 and reinvigorated in life and business

    • Frank Burzesi | August 22, 2018 at 11:09 am

      Charles is the second generation, and had the luxury of having the assets in place with no debt to operate the business. If he had to start from scatch he would have needed significant seed capital or a loan from the bank.

    • Stephen Lynton | February 20, 2019 at 12:27 am

      Debt is a simple choice. If I borrow @ X% can I invest and make X++% as a result? Not rocket science as long as you know your market. Problem is, a lot of business owners don’t make that decision wisely. Growing a business requires debt to finance the expansion and it only makes sense to take on that debt if you have a solid expectation that you are using the borrowed money to finance a project that has a very reasonable expectation of a return well in excess of the cost of funding it. If not – don’t. I have long told my financial advisor (that always wants me to give him every penny I own to invest in his funds) hey, I can give that money to you and you are “promising” me a 6% annual return. If I invest wisely in new products etc. I can make a 50% return.
      So the answer is “investing wisely”. That’s different for every business but the bottom line is, don’t borrow money unless you have a very strong (realistic) expectation of being able to repay it timely, and at a net profit when all costs are considered.

      • Hannah Sullivan | February 20, 2019 at 7:56 am

        Thank you, Stephen, for sharing these insights. Thank you again for reading!

    • Jackie Wright | February 20, 2019 at 12:42 am

      Learn so much from you guys,
      Not sorry to use your company as my insurance.
      Thank you.

      • Hannah Sullivan | February 20, 2019 at 7:57 am

        Jackie, thanks so much!

    • Brenda Thomas | February 20, 2019 at 6:29 am

      Debt is a big concern of mine. I have a seasonal business and it’s still relatively new. The comment about the almost inevitability of debt for new businesses was reassuring. Also knowing guidelines for repayment. I’m also encouraged by the risk taker who ultimately prevailed and thrived with his printing business.
      Thank you for these posts Hartford and thank you all for your comments. Older (over 65) new business owner

      • Hannah Sullivan | February 20, 2019 at 7:57 am

        Brenda, thanks for you great feedback! We are glad we can help.

    • David Linendoll | February 20, 2019 at 8:57 am

      Graduated high school in 1977,started working in a hardware store at age of 17. Bought out one of the partners in 1989 with a small down payment and a 10 year note. I now have two hardware stores 20 miles apart and a Liquor store which is increasing from 1200 square feet to 5000 square feet with a small line of credit from the bank. My wife has a 4500 square foot Beverage Center ( Beer store) that she opened 4 years ago after retiring from her job of 31 years. Start up money was a home equity line of credit. It can be done but we both work average of 60-65 hours a week, but we enjoy what we do.

      • Hannah Sullivan | February 20, 2019 at 9:48 am

        David- congrats on all your success! Thank you for sharing your experience.

    • Glenn Rebechini | February 20, 2019 at 11:08 am

      In late 2008 I decided it was time to expand my business and consolidate operations under one roof in a larger facility to facilitate growth. We were going from 2 +/-6000 sq ft buildings to a 20000 sq ft facility. unfortunately 2 weeks after the purchase of our new building the market crash happened.Thankfully I had construction financing in place prior to the crash. Bad news was after the crash our 2.1 million dollar new facility appraised out at $685000 less then what we just put into it. This was huge as I had just put most of my personal savings into the construction and purchasing of new equipment.

      Jumping ahead to the present, I have changed banks and business in thriving. We are paying down old debt, but loans are key to growth. I just took out a loan to purchase a large piece of equipment that we needed to replace to stay competitive that I could not fund on my own. However other new equipment I have funded through our cash flow.

      I believe some debt is fine, you need to know your companies limits, don’t overextend and manage your debts wisely. If used wisely debt can fuel growth.
      Since moving into our new facility we have grown from 1.8m in sales to right around 4.8m in the past 8 years. The last year and a half have been phenomenal due to our new banking PARTNER…I really can’t stress this enough. Our old bank was strangling us and after the building mortgage debacle really left us with a bad report. I was afraid to switch however until 2017. But switching banks was the best thing I ever did. Much better rates, a personal banker who listens to our needs and whom is proactive with us. They have help expand our growth rather than crush it. If taking on debt, research and shop for the right bank!

      Thanks Hartford!

      • Hannah Sullivan | February 20, 2019 at 2:23 pm

        Glenn, congrats on all your success and thank you for sharing your experience with us!

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