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.