There is always an element of risk when it comes to borrowing money. While some small businesses might be able to turn a profit, thanks to the additional investment capital, there are others that will only accrue a crippling amount of debt from these substantial loans. So, how do you decide whether your business is in a position to borrow money or if you are better off staying out of debt? In this episode, Gene Marks and Elizabeth Larkin help small business owners determine their best financing options by assessing their ultimate goals.

Executive Summary

3:35—Today’s Topic: Is It Better to Grow My Business By Borrowing Money or Should I Focus on Paying Off My Debts First?

5:10—Avoiding debt for fear of the risks involved can often cause small business owners to miss out on opportunities that would enable them to grow.

6:46—Your overall goals as a small business will ultimately determine which approach you take.

8:27—If you choose to finance your growth with borrowed money, you should perform a discounted cash flow analysis to find out which aspects of your business are most likely to produce a profitable return.

13:01—While it is important for small business owners to be aware of the current financial climate, don’t let the fear of an impending recession hinder you from taking risks.

15:45—To ensure the security of their data, Gene advises small business owners to enable the multifactor authentication option on all their software applications.


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  • Transcript

    Elizabeth: Welcome back to the Small Biz Ahead podcast, I’m Elizabeth Larkin from The Hartford and I’m here with Gene Marks from The Marks Group.

    Gene: Correct.

    Elizabeth: And just because we have a bunch of new listeners this week, I just want to introduce Gene’s background a little bit into this.

    Gene: Yes. Five-time gold medal winner.

    Elizabeth: Decathlon.

    Gene: In track and field. That is correct. I’m most proud of that.

    Elizabeth: And basketball.

    Gene: Yeah, basketball as well. Well I was on the team, so I got a medal for that. But you know.

    Elizabeth: Yeah, you’re a good teammate though. So, Gene, you own a small business. How many employees do you have?

    Gene: We have 11 now.

    Elizabeth: You added someone.

    Gene: About that.

    Elizabeth: That’s exciting.

    Gene: We have about a dozen contractors that, you know…

    Elizabeth: Function.

    Gene: Give us lots of hours, I might say. Yeah.

    Elizabeth: You consider your contractors kind of part of your team.

    Gene: Oh, I absolutely do. Everybody gets email addresses and phone extensions and all that kind of stuff.

    Elizabeth: Okay, so your business is a small tech company.

    Gene: Correct. So what we do is we install business software. We specialize in CRM, customer relationship management. So it’s like we do and Microsoft Dynamics and Zoho, and then we do some of the accounting applications like QuickBooks, Xero, and things like that. We set it up and then we provide all services under the sun related to those applications.

    Elizabeth: Great.

    Gene: And then we get yelled at from our clients when they don’t work right.

    Elizabeth: Okay. So in addition to that, you also fly all over the country speaking and presenting.

    Gene: Do a lot of speaking.

    Elizabeth: At trade groups and civic groups and you speak to, I would say, what do you think? A million small business owners a year?

    Gene: I don’t know, I speak to a lot. Elizabeth, so I write in a bunch of different places as well as Small Biz Ahead. But then I also speak on a lot of the topics I write about to a lot of industry associations. About 60 times a year.

    Elizabeth: So I just, I guess the picture I’m trying to paint here is that you are all about small business owners. You talk to them constantly.

    Gene: I learn from them constantly.

    Elizabeth: You have a real pulse on what is going on in their head all the time.

    Gene: Yeah I do. I really do. I speak to rooms of anywhere from 50 to 500 small business owners at any given time and they are literally small business owners in America. And I speak in Vegas, in New Orleans, in Orlando, and you know Kansas and Wisconsin and wherever. But yes, I feel like these are my people.

    Elizabeth: So if you’re a small business owner and you’re thinking, oh my gosh, all the decisions are on me, this is so much pressure.

    Gene: I get it.

    Elizabeth: You’ve come to the right place.

    Gene: Yeah, I get it.

    Elizabeth: Because everyone feels like that. And that’s why we do this podcast for you, so we can bring these issues and talk about the issues that every small business owner is facing. So today we have a great one because it’s what do you do in a financial situation?

    Gene: It’s about debt, right?

    Elizabeth: It’s about debt. Do you borrow money to stimulate growth? Or do you pay down debt first? So after we hear from our sponsor, we’re going to get into that topic.

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    QUESTION: Is It Better to Borrow Money or Pay Down Debt First?

    Elizabeth: So, Laurie from East Hampton, Massachusetts wrote in, she owns a machine shop there. That’s actually very close to here in a beautiful area of the state.

    Gene: Is it? Okay!

    Elizabeth: She writes, and this is, I love questions like this. I really like the long detailed ones, but then once in a while it’s kind of nice to go…

    Gene: She’s cutting to the chase with this question.

    Elizabeth: Laurie’s question is, is it better to borrow money to stimulate growth or pay down your debt first and grow more slowly?

    Gene: I mean, it’s a loaded question because it really depends. And so, and Elizabeth, I got to, I’m going to ask kind of for you to input on this as well when it comes to debt, like what is your feeling about debt? Do you think, do you like to have debt? Or do you like to be debt free? Different people feel different ways.

    Elizabeth: It depends on the debt. Like do I want to have credit card debt? No, that makes me feel terrible. But my student loans, my mortgage, you know I don’t feel bad about those. Car debt, you know, making payments on a car, I don’t love that. But if sometimes it’s just a fact of life. But like when I do have credit card debt month to month, I have a pit in my stomach.

    Gene: So it’s certain types of debt that you have, but you seem like you understand debt, you accept it.

    Elizabeth: Yes, I accept debt.

    Gene: Okay. That’s fair enough. With me, I’m like I hate debt so I don’t have any debt in my business and my mortgage has been paid down.

    Elizabeth: Yeah, it’s a little different between personal debt and business debt.

    Gene: Maybe. When you run a small business though, a lot of it is personal. There’s a lot of overlap. But the point that I wanted to make, and this is for Laurie who asked about, is it better to borrow money? I don’t like debt. I avoid debt and therefore I forever will be nothing but a small, small business owner. That’s all I will be, because I don’t take risks and I don’t look for financing and, therefore, I pass up on opportunities and profits and value that can come if I were more risk-oriented or finance-oriented. So, for me and my business, I grow it. I stick the cash in the bank. If I’m going to spend money on training or some type of asset or some type of investment, I’ll never get financing for it. I’ll usually take it out of savings or reserves to do that and I’ll make sure I’m not spending the farm because that’s the way I am.

    But I want to be clear that because I’ve made those decisions over the past 25 years, I only run an 11 person company. I don’t run an 11,000 person company and the people of this world, the entrepreneurs, the people that, you know, are the innovators and the ones that are really behind the growth of this country, they’re not like me. They take risks. They’re risk takers and they borrow money, whether it’s from banks or from investors or on the stock market or however they’re getting money in. They take money so they can finance their dreams and they can live with the risks of doing that. And the reason why I say all that, it’s so I get back to you, Laurie, as an owner of a machine shop in East Hampton, Massachusetts, what kind of a business owner are you? Are you a risk taker or are you a risk avoider?

    There’s no right answer to that question, but there’s definitely results from that, that you have to be aware of. If you are a risk avoider like I am, you will most likely never be anything more than Laurie from East Hampton running a machine shop and there’s nothing wrong with that! You can run a profitable business that way and sleep soundly at night and no one says you have to be the master of the universe. But maybe, Laurie, you’re more of a risk taker and you don’t want to just run a machine shop in East Hampton. You want to open up multiple machine shops or you want to buy another company. Or, you don’t want to just have a few employees, you want to have hundreds or thousands of employees. You are not going to do that unless you take risks and finance those dreams, which means that you are never going to pay down your debt. You are always going to be fueling debt, which will be hopefully financing your growth and your dreams.

    Elizabeth: And is this where, first of all, I love the way you approach this because it’s not a one size fit all answer.

    Gene: It’s not.

    Elizabeth: It really depends on your personality. Is that going to keep you up at night knowing you took out a $10,000 loan for a new piece of equipment?

    Gene: Oh and I have to interrupt you and I’m sorry, but it’s not actually just keeping me up at night. It would keep my wife up at night. There is your family, your significant other, to consider in this as well. She would be really upset if I was taking risks. I know that would upset her and part of my decision was, well, I don’t want to upset her. I don’t want her being upset with the risks that I’m taking either.

    Elizabeth: But let’s say you do say, “You know what? I’m willing to take on that risk. I want to grow. Is this where the discounted cash flow formula would come in?

    Gene: Yeah, it is and I’m glad you brought that up.

    Elizabeth: And we will link to that, Hannah will link to that in the show notes.

    Gene: If you make that decision, so Laurie, we’re talking to you, and you know you’ve said, “Listen, I’ve got the opportunity, I want to finance my growth.” Well, first of all, the question is, is what do you need the money for? And this is where your discounted cash flow analysis comes in because you have to know what you want to invest in. Do you want a new piece of equipment? Do you want a new piece of property? Do you want to invest in new people or some type of marketing? The best investments are tangible and ones that you can estimate to as accurate degree as possible what your return on investment will be. So you run a machine shop and you can get a piece of, you want to get a piece of equipment for $50,000 because you know once that’s up and running, you could be generating, I don’t know, $100,000 a year worth of work off it.

    Well, then it makes sense to get financing for it because you can sit down and do a discounted cash flow analysis and show that for that $50,000 in debt, you know you can pay it back with interest well and above with the profits that you’re making from having this machine up and running. Now, if you were going to say to me, “Hey, I want to borrow $50,000 for a marketing campaign that I’m going to send up to try and attract new customers,” then you’re taking a lot more risk because marketing is like, a lot of it’s like sort of tossing a coin. You don’t know for sure if people are going to respond to this campaign and if it’s going to succeed. So, you might take that $50,000 in debt and then have no revenues to show of it because the campaign wasn’t good. And now you’re paying back this $50,000 with money from other operations in your business that you weren’t planning on.

    So, you need to know what you’re going to spend the money on. You need to try and minimize your risk with whatever your investment is. In other words, you want to know how you’re going to get paid back, what return it’s going to generate, and then you need to compare that return against the cost, the maintenance of that debt over the life of the debt so that you can get yourself comfortable that like, hey, I can not only pay that debt down, but make more money on top of that.

    So the other example I like to give is that if you’ve got, say, $50,000 and you have a machine that you want to buy, you can say to yourself, “Listen, I can take that $50,000 and I can stick it in the bank and it earns 2% interest a year, you know. Or I could put it in the stock market, maybe it’ll earn a lot more, or maybe I’ll lose my money because I’m giving the control of that $50,000 over to other people who are going to be using that money for their purposes. Or I can buy that piece of equipment where I’ve got complete control of it and I know I’ve got orders in the bank where I can generate revenue from it and it’s more of a guaranteed return.”

    So it’s, first you decide whether or not you’re the kind of person that wants to take the risk with debt. And then if you are that kind of a person, you want to just make sure before you enter into any debt, you have done a good discounted cash flow analysis where you are proving to yourself over the next three, five, seven years, here’s how I’m going to make my money back on that debt. Phew, you’re welcome, Elizabeth. You’re welcome. There, that’s my speech.

    Elizabeth: That’s a mouthful. Okay, now let’s talk about my personal debt. No, I’m just kidding. We’re not going to do that.

    Gene: Oh, we have time to talk about that. I mean, that’s overwhelming.

    Elizabeth: I’m like in the middle of buying a new home right now and it’s like very stressful.

    Gene: Well, you know, it’s funny that you bring that up because we talked before about personal versus you know small business. It really is very interrelated. And if you’re buying a new home, you went through the calculation. You’re not making profits personally, but you went through the calculation is if I have this new house, I look at my debt maintenance, will my income be able to cover that?

    Elizabeth: It’s actually kind of surprising. I didn’t forward all the info to you to be like Gene, what should I do?

    Gene: I’m kind of surprised that we didn’t go through that. But it is a, and then whatever I recommend to you, you would just do the exact opposite, which would be the right thing to do. But the thing with the debt coming in is that you personally have to not only decide that your income can cover it, but will continue to cover it for years. And you also have to have sort of a good comfort level that you’re always going to have that level of income over a period of time. It’s not that different than what you know a small business owner has to make over that piece of equipment. If they’re going to have to maintain that debt over a period of time, will they have revenues coming in from that equipment?

    Elizabeth: Here’s another question with just, you know what small business owners kind of, as I alluded to in the beginning, you really know what’s on their mind right now. Everyone is saying, “Hey, we’re going to have a recession pretty soon.” So does that, that makes this calculation a little more complicated.

    Gene: It does. That is, first of all, that’s a whole other conversation for another podcast about how to figure out if a recession is coming, because there are some good metrics that will help you do that.

    Elizabeth: Oh, I know a podcast that could cover that.

    Gene: Who? … It’s this podcast that could cover it!

    Elizabeth: This podcast!

    Gene: But having said that, if you really are not, you’ll never be 100% certain as a business owner. But if you, if the numbers and your gut and your experience and what you’re hearing what the market is telling you that a slowdown could be coming, and that may or may not, enter into your conversation, into your decision to buy something. Just remember though, that recessions are a great time to make investments, because a lot of people were looking to get out. And if you’ve got cash in the bank and you’ve got enough cash flow to be able to afford an investment, then you know don’t get scared just because a recession is coming along. To me, I think recessions are opportunities with people that not only have cash available but also have financing available as well, to take advantage of some of those things.

    Elizabeth: Great. Thanks Gene. That was a really thoughtful answer. And I think you know, usually when people write into columnists asking that question, you get the, well this is the calculation. You actually said, “What kind of person are you?”

    Gene: Yeah, it really depends on the person.

    Elizabeth: Like can you handle this?

    Gene: And it’s funny, I wanted to talk about that because I had a similar conversation recently and I came to that realization after running a business for 25 years. I’m just, I’m not that guy, so I’ll always be that small business guy, you know. So, if you’re looking for me at a grow your business and take it public and be master of the universe, I’m, that’s not me. I’m a more conservative kind of guy and I think a lot of business owners are like me.

    Elizabeth: Definitely.

    Gene: But that’s just the way I am.

    Elizabeth: Okay, we’ll be right back with Gene’s word of brilliance. Stay with us.

    WORD OF BRILLIANCE: Multifactor Authentication

    Elizabeth: And we’re back. Gene, tell us your word of brilliance.

    Gene: Two words, I’m going to ask you if you know what this is. Multifactor authentication.

    Elizabeth: I do know what that is.

    Gene: That’s impressive. How do you know?

    Elizabeth: Okay, so I have, I’ve had this Capital One savings account for years. I started it when they were ING and I just put a tiny bit of my paycheck in there every single month and I never log in. I never touch it. But now that I’m going through the process of buying a house, I’ve been going into that account to be like, how much do I have in there? What do I need for down payment? Yada yada. When I log in now, I log in and then it says we’re going to send you a passcode.

    Gene: So your password is not good enough.

    Elizabeth: Yeah.

    Gene: Not good enough.

    Elizabeth: Well, they do this to everyone. I signed up at some point for two-factor authentication. Then they text me another code and then I put that code in. I remember years ago when Google started doing this to my Gmail account, I’m like, what if I don’t have my phone with me? That’s crazy. But now we always have our phones with us.

    Gene: Correct, correct.

    Elizabeth: And last night, this is kind of applicable, I got an alert from Netflix saying that someone had logged into my account in Egypt, was it me?

    Gene: Wow.

    Elizabeth: That would have been helpful in that situation because I’m pretty sure someone in Egypt is now in control of my Netflix account.

    Gene: Wow.

    Elizabeth: Yeah. That’s my experience with it. But I don’t know what the actual definition is.

    Gene: Yeah, well you just did it. You just said what the definition is.

    Elizabeth: Great, I’m so smart.

    Gene: Multifactor authentication, if you’re listening to this, I’m sure you’ve experienced it already because now, thank goodness, when you go to like your bank, if you try to log in to your online account at your bank, you just, passwords aren’t good enough and why aren’t they good enough? Because it’s all that data’s been stolen by now, hasn’t it? It’s all out there. It’s all been hacked. It’s all been whatever.

    Elizabeth: We all use the same three passwords for everything.

    Gene: We use the same passwords. People have stolen it, we all know that. So like that’s terrifying that somebody can log into your bank account because with a stolen password that they purchased on the dark web. So obviously the banks have gotten smarter and so now you can’t just log in, you try to log in and like, we’re not a 100% sure it’s you. We’re going to send a text message to your cellphone, like you just said, and everybody carries around their smartphones, with a code and then you put in the code and then the bank’s like, okay, we know it’s you because, you know, multifactor, two ways to get in, right? Sometimes it’s more than two but, in this case, it’s two ways. This is the way that companies are doing security now and this is the way that your business has to be doing security as well.

    Whatever applications that you are using, whether you’ve got them set up on your network or whether you’re using a cloud-based application or whatever, you have in your accounting system, your whatever, you need to make sure that you’ve got multifactor authentication enabled. Which means, if it’s not, if you’re just getting access to it with just a password, particularly when you’re out of the office, you need to change that and the way you change it is you talk to your software vendor or you talk to the person in charge of your network or in charge of the company that might be hosting your applications and you say to them, “We need to implement multifactor authentication so when people are logging into our systems and getting access to our database and our information, our customers’ information, we want to be absolutely positive that they are authorized to do that.”

    And again, the most popular way is to do it and then confirm it with a text message to your cellphone. Sometimes people confirm it with an email to another email address, a second email address but it’s multifactor, it’s not just the password entry. That’s where security is going, Elizabeth, is where it is. And by the way, what’ll happen over the next few years and don’t run away from this if your vendor tells you, multifactor authentication can include and will include biometrics, which means a fingerprint or a retinal scan or even facial recognition. Now again, that technology…

    Elizabeth: Oh wow, that’s kind of creepy.

    Gene: Some of it is and some of it is not and there are companies now that if you try to log in and it says, “Well the password is fine but we need to see your fingerprint to be able to log into that system,” more and more common among applications. The bottom line is, as a business owner, make sure that your company has multifactor authentication enabled for all of your applications. You do not want to get your data hacked, you don’t want to give it away in that way and you certainly [don’t] want to be subject to the potential liabilities that could cause your business interruption if your data does get hacked. Multifactor authentication.

    Elizabeth: Great.

    Gene: Yes.

    Elizabeth: Now do you have another TV show recommendation?

    Gene: I have many TV shows to recommend, so I’m going to recommend another one that I watched that I really enjoyed. Ready? BoJack Horseman.

    Elizabeth: Oh yes.

    Gene: Have you watched it?

    Elizabeth: Yes.

    Gene: It’s a cartoon.

    Elizabeth: You’re a little late to the party on that one.

    Gene: Okay, I am. Listen, some of these shows, I’m just catching up, but BoJack it’s in its last, it’s just entering its last season. It’s just starting like I think in October.

    Elizabeth: Oh that’s the best time to start a show.

    Gene: It kind of is. There’s their last season starts in October. Then I think it’s going to go through the spring for if you’re listening to this and you have not ever seen it. It’s a cartoon and it’s not like I’m very big on cartoons, but it’s a dark cartoon. The characters in it are very real and there’s sort of amorphous characters. There’s humans, there’s animals, but they all sort of interact with each other in a really funny way. Nobody seems to notice that BoJack is a horse, half horse, and his agent is half cat but then he has, her social media person is a full, is a regular human. But one of the people that he knows is a dog, Mr. Peanut Butter, but you don’t really notice that. It’s funny but the themes are really interesting. The writing is actually very good and the voices, Will Arnett plays BoJack Horseman. He’s great. And the guy that plays Jessie on Breaking Bad is, why am I forgetting? Aaron. What’s his name?

    Elizabeth: Aaron Paul?

    Gene: Aaron Paul. Yeah. He plays his friend on it. He’s great. There’s all these well, Amy Sedaris is on it. BoJack Horseman’s really a worthwhile binge and I enjoy it very much.

    Elizabeth: Great. The reason we allow Gene to give us these recommendations-

    Gene: That’s why I come back every day.

    Elizabeth: For new listeners, joining us for the first time this episode, it’s because Gene travels constantly and he needs an outlet to give us these cultural reviews. That’s A. And B, small business owners, you don’t have a lot of downtime, so we want to steer you in the direction of the best TV and movies and books.

    Gene: Thank you, that’s a good point. So let me tell you something.

    Elizabeth: When you do have downtime.

    Gene: Thank God for 2019, that we live in an age where you can have an iPad or a Kindle and be able to watch all this, all these, this incredible content. And you know what’s really interesting, Elizabeth, is when I go on a plane, if I get up to use the restroom on a plane and I walk back down the aisles, nobody seems to be reading books today. Everybody’s watching TV. You know what I mean? For good or for bad, it is what it is. And if you’re a business owner, there’s so much content that’s out there. When you do have some downtime, you’d like to watch something good you know to take your mind off your business. Come to me, I’m going to have, I’m recommending good stuff for you to watch here. This is interesting.

    Elizabeth: We’re at the end of this episode, but I want to encourage listeners to please leave us a review on Apple Podcast, that really helps us get the word out. Tell us how you feel. What’s your debt personality type? Are you comfortable with having debt? Do you have any good TV show recommendations for Gene?

    Gene: Do you disagree or agree?

    Elizabeth: Yeah. Do you disagree or agree with the answers? And stay tuned for the next episode because it is going to be a surprise to Gene, the question I ask him.

    Gene: Oh boy.

    Elizabeth: The question is from me and it’s going to be a surprise.

    Gene: Oh boy.

    Elizabeth: Stay tuned.

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