Episode 56: Should You Take on Business Debt?
Transcript Episode 56
Stephanie Skryzowski
Welcome to the 100 Degrees of Entrepreneurship podcast the show for purpose driven entrepreneurs who want to get inspired to step outside of your comfort zone. Expand it to your purpose and grow your business in a big way. I’m your host, Stephanie Skryzowski, a globe trotting CFO whose mission is to empower leaders to better understand their numbers to grow their impact and their income. Let’s dive in!
Hey, everybody, welcome back to the 100 Degrees of Entrepreneurship Podcast. I’m excited you’re here today, we’re talking about kind of a hot topic. Today we’re talking about business debt.
So there are a lot of schools of thought around business debt, or really any debt honestly. There are some financial gurus who will remain nameless in this episode, that basically think all debt is bad. Literally, all debt, even student loans. Bad, bad, bad, bad, bad. And your goal in life should be to eradicate this debt at all cost.
I am not one of those people, I think there is a time and a place for debt in your life in your business. I mean, I would not be where I am today, in so many ways.
If I had not gone to undergrad, gone to grad school… and in order for me to do that, I needed to take on student loans, right. And so everybody has their own personal opinion on that. And I’m not telling you that your way is right or wrong.
I’m just sharing what I feel about business debt, in particular; we’re not going to talk about or we’re not going to talk about personal debt. To each his own there, we’re gonna talk about business debt. So I believe that taking on debt for your business is not inherently bad.
Right, I get asked the question a lot. Is it ever okay to take on debt in my business? Should I get a loan? Should I use a credit card in my business? I feel like we’re really conditioned to believe that debt in our personal lives is bad.
And in many, many cases, it is right? When we have consumer debt, when we have credit card debt, it really holds us back from having true financial freedom in our lives. And so if you have a credit card, simply because you don’t have control of your spending, or you’re spending more than you make. Yeah, that’s bad, right? We all know that.
The same is true in our business, spending more than you make is a recipe for disaster in our business. And it’s very easy to invest in our businesses too soon. Hiring the wrong people, get more software and or systems than we really need or dump money into strategies that haven’t proven themselves to work yet.
And so I have found that overspending often leads to taking on debt with a false hope that this magical cash influx is going to change your habits and solve all of your problems. And that literally never works. I have seen it before. I have seen business owners take on debt in some way, shape, or form, maybe it’s a loan from the bank, maybe it’s a brand new credit card. So they have some cash flow for investing in a business model that has not yet proven itself.
That’s not going to work. So in that case, no, I absolutely do not recommend any debt. However, however, using a business credit card, or obtaining a line of credit or loan can work really well in certain situations, and is totally acceptable in my book. So before you run out, and you’re like, okay, this CFO said business says, okay, let me get a big loan.
No, no, no, no. Before you run out and apply for the first loan that you can find, or the first bank that’s going to give you money, I want to share when I believe that it’s okay to take on some debt in your business and when it’s not okay. And most importantly, what you absolutely must do first. Okay, so this is not like, okay, Stephanie said, It’s okay, let me go get a loan.
No, you have to meet certain criteria, and you have to do something else first, okay. And so I’ve had several clients that have taken on debt before in their business. In fact, I recently just helped a client get a very substantial loan from the SBA, the Small Business Administration, but we went through the process of figuring out how much we need and how we’re going to use it and how we’re going to repay it first. So I’ll get into more detail on that. So here’s what I think. I think it can be okay.
Notice, I said it can be okay. I did not say it’s always okay, right. It can be okay to take on debt when timing is an issue. Okay, so many businesses have high months and low months, right? We have several clients that make like 75% of their revenue for the whole year in Q4. Which means in those months leading up to Q4 cash flow can get really, really tight, because they basically have to use everything that they made in Q4, all that cash that came in in Q4 to stretch and last them the other nine months of the year, right?
So they know based on historical numbers, so they know their patterns and their history as a business that a particular month or quarter is slow, but then the following quarter picks back up again. So they need an influx of cash to cover operating expenses in advance of a big sales month. And this is okay, this is okay to take on debt because they know they have a proven business model.
So they know that the sales in the upcoming months are basically guaranteed, right? They have enough history and enough proof to know like, okay, we know, Q4 is a huge month for us, we know we’re going to make most of our money here. And those sales are substantial enough to cover any debt that they take on.
So again, you could take on a potential loan, or some sort of cash advance or line of credit or whatever it might be, but they know that they’re going to be able to pay it back within a certain time period, right? So if timing is an issue, it can be okay to take on debt. It can also be okay to take on debt when you need capital to produce your product, right?
So if you have a physical product, you’ve got to shell out some amount of cash before you sell it. Oftentimes, you’re shelling out most of the cash upfront, before you actually sell the product. And so this is another time when it can be okay to take on debt to produce your products.
Assuming that there’s a proven market to purchase that product, and you’ve got healthy margins, right? I would not go and take on a loan, a six figure loan to produce a product that has never sold before, right? You have no idea if it’s going to do what you think it’s going to do, if you’re going to make the money you think you’re going to make.
So I would not take on a huge loan, you know, in order to be able to do that. But if you have a proven business model, a proven desire in the marketplace for your product, and you need a little bit of cash upfront to be able to produce more products, you can sell more. I think that is an opportunity for a little bit of debt.
So on the flip side, let’s turn this around. It is not okay, in my opinion, to take on debt, when you don’t have a proven business model and or a plan for revenue. So if it was me, I feel like I’m pretty conservative when it comes to finances.
I would not go out and take on debt for a business if I don’t know that that business works. I’m only comfortable with a business with a client taking on debt, if they’ve already been successful with their current business model. Where people have already purchased your products or services. It’s not a brand new or untested idea. Because the last thing you want is a boatload of inventory, no one to purchase it and a brand new debt payment that you can’t make, right.
So let’s do some testing before taking on debt and make sure we have a proven business model. Before we’re saddling ourselves with something we’re gonna have to pay into the future. The second time that I think it’s not okay to take on debt is when you have not tried other things to improve your cash flow first.
So if you’re finding yourself short on cash, I don’t recommend taking on debt before doing what you can internally organically to improve your situation first, right? So cutting unnecessary expenses, canceling those unused subscriptions, reducing items that are not generating a solid ROI, right? Do the things that you can easily do first.
If you’re at the point where you feel like your business needs to take on debt, but you haven’t tried to but you’re not willing or haven’t tried to reduce expenses or do other things internally first, you’re not ready for that debt. Okay, do what you have control over and you have power to do if you’re not willing to reduce your expenses in any some or any way, shape or form. You’re not ready for that debt yet.
Also think about what is working in your business? Are there revenue streams that you could increase now? Are there ways that you can double down on things you’re already doing to bring more money in the door before you go take on debt? Debt is not the easy way out, right? Debt is not an easy way out.
So we’ll work through your P&L work through your profit and loss, meaning go through every line item in your profit and loss. And ask yourself the question, is it for revenue? Is this working? Can I do more of this organically without taking on debt for the expenses? What am I not using here? What is not essential to this business?
Cut those out before taking on debt, just like there’s no pill to lose weight that you want to lose. Taking out a loan is not going to magically solve all of your financial problems. It’s going to make your bank account look pretty for a little while until all that money is gone and you’re back to where you started, right?
So do everything that you can do to improve your cash flow first before taking on that debt. So If you have listened to everything that I have said so far, and you’re like, okay, well, my business is still in a sticky situation. And I still think I need some cash flow, I think I could use a little loan to get me through this bridge from where I am now to when all the sales are going to hit whatever.
So here’s what I want you to do first. These are prerequisites to even opening that tab on your browser and looking for a business loan. I first want you to create a 12 to 18 month forecast of revenue, expenses in cash. So think about the future of your business and write down each potential revenue stream.
Now, I don’t mean like, think about all the new business ideas, right? We’re not trying to create things from scratch. I’m thinking about your current business and think about all of the revenue streams that you have. And write down month by month. So like January X amount for this revenue stream, and revenue, February, March, April, go month by month. I want you to do the same thing for expenses. And this should be after you’ve already cut through your expenses and removed whatever is unnecessary.
List out all of your expenses and put them in the dollar amount that you’re going to spend each month. January, February, March, etc., right? Now that you’ve done this for 12 months, you want to make sure that you’ve got this really clear picture of your business for the next year.
You want to make sure, basically, what we’re doing here is looking at like, okay, do we see the potential for revenue growth? We want to make sure that our business is growing in the right direction, right? And that profit is strong, so that you will have the cash to repay the loan and the credit card or whatever when payment starts to kick in, right?
So, I’m going to take a quick break and tell you about something that I think is really going to help you with this.
You hear me talk all the time about how important it is to know your numbers as a business owner. But you may be thinking, well, how in the world do I do that? Where do I even begin? So, I have a free resource for you. The profit playbook is an amazing template that you spend about 15 minutes getting it all set up. And you can literally see into the future of your business revenue, expenses, cash flow, just like a crystal ball. It is a huge resource that will absolutely help you create a roadmap to reach your goals in your business. It is for free, over at 100degreesconsulting.com/profit
Okay, so now that you’ve downloaded the profit playbook. This basically this forecast that you’ve now created in this template really needs to include a realistic path to profit, right? We want to see profit and debt repayment, right?
Your forecast should be realistic. It should not assume that your revenue is going to go from $1,000 a month to $100,000 a month overnight, because unless you have some magical something (and I want some of that), unless you have some magical something that’s probably not realistic, right.
So, this forecast should be realistic. Also, I want you to think about timing, right? If you’re launching in November, the cash might not land in your bank account until December.
You want to make sure that you’re thinking about timing when it comes to your forecast as well. So to sum all of this up, here’s my stance. I am okay with temporary debt in your business, if you have a proven business model. Proven revenue streams and 12 to 18 month projections for repayment with strong margins.
I am not okay with debt if you’re using it to fund ongoing operating deficits. So sometimes putting things on a credit card or taking out a loan is simply a matter of timing. If your business is cyclical, this quick cash infusion may help keep you in the black until revenue picks up and you’re easily able to pay it back.
And this is why it’s so important to know what’s coming around the bend with a forecast. So my friends, that is my take on business debt. I am so curious to hear what you think if you’re like, oh no, Stephanie, You’re so wrong. All business debt is bad. Or if you’re like, oh, yeah, okay, I think I could get behind a forecast and then potentially having some business debt only if it’s absolutely necessary. And you have done everything you can to avoid it.
So let me know what you think. Hit me up over on Instagram @stephanie.skry and tell me what you think about business debt or if you have any other questions. I’ll catch you next time, friends.
Thanks for listening to the 100 degrees of entrepreneurship podcast. To access our show notes and bonus content, visit 100degreesconsulting.com/podcast. Make sure to snap a screenshot on your phone of this episode and tag me on instagram @stephanie.skry and I’ll be sure to share. Thanks for being here friends, and I’ll see you next time!
Transcript for Episode 56
