Three Myths About Small-Business Debt

from on 05 Oct 2011

There is an old saying that if you repeat something often enough, it becomes the truth. That can be a dangerous practice in the business world, especially when it comes to handling your money. So to help you separate fact from fiction, we are listing the three biggest myths about debt that need to be debunked. Here’s our top trio of non-truthfulness.

1. You can’t build or expand a business without debt.

Nonsense, baloney and simply not true. Just ask the founders of Apple Computer, Mattel Toys or Starbucks—all Fortune 500 companies that started with next to nothing. The truth is, according to the Census Bureau’s data, 60% of all small businesses opened in a given year need less than $5,000 to start . They don’t want to begin their dream saddled with huge debt.

2. A line of credit is needed to cover cash-flow fluctuations.

Once again, not true. With good accounting and budgeting practices, any business—even those that are seasonal or unpredictable—can forecast their cash flow and be ready for down times throughout the year. Plus, having cash saved (retained earnings) allows you to become your own line of credit.

3. Large purchases require debt.

Okay, you understand not going into debt for pretty much anything. But what about those big purchases, like real estate or expensive equipment, that can costs thousands and thousands of dollars? You have to borrow, right? Absolutely not. The same theory holds true for the big-buck buys. You don’t need to borrow. Instead, make a plan, save for them and pay cash.

Dave systematically saves toward a purchase goal and puts a very specific amount as a line item in the monthly accounting, almost as if it were an expense.

In the meantime, he:

  • Rents until he can pay cash.
  • Outsources to avoid going into debt.
  • Buys used instead of new at a significantly lower cost.

The best way to grow your business is to take a lesson from The Tortoise and the Hare. Slow and steady always wins the race. You don’t need to borrow money to make it big. Instead, save for what you need and then expand. It lowers risk and minimizes mistakes. And that’s the truth! No myths allowed.

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