There is no such thing as good debt. People like to say small business loans, student loans and house loans are ‘good.’ People are wrong. It’s better to be debt free, especially in business.
The average US small business owes $195,000, and a quick search shows business loans anywhere between 6% and 35%. Over 10 years, the payback for a loan of this type would be somewhere between $260k and $700k.
Leveraged companies, I’ll hand it to you guys — you must have balls of steel to take on that kind of risk. And this is the lower end of the debt spectrum.
Debt should be a last resort, not the first.
Here’s the thing. If your new business venture is online — say online writing, building websites, or graphic design — your startup costs will be relatively low. All it’s going to take is a few hundred dollars for some software, maybe some advertising or perhaps a couple of thousand if you’re throwing in a new laptop.
But what if your business dream is something more physically concrete? Something with a physical presence like a fitness gym, a store, or a company that requires a large stock holding or a business that needs specific tools, like plumbing or electrics. Then what?
In 2013, I opened a high street wine store — a notoriously expensive industry — with no debt and just a few thousand pounds in my back pocket.
In my 7 years of business ownership, I took on no debt, made profits every year and eventually sold the company for a substantial amount of money, mainly because it was profitable and non-leveraged.
It can be done, even if you have high startup costs and the industry you dream of being a part of tells you that it’s not. Here are 5 ways you can look at starting a business debt free.
1. Slow down and save first
We have forgotten how to save. With all that money floating around, yours for a low-interest rate, it’s easier to leverage than save, right?
Slow the hell down. Yes, saving takes longer than a phone call to a loan company. But a good business idea now will be a good business idea in a year or two, perhaps even better. Plus, if your company’s only creditor is yourself, you get to set the repayment rules (long) and the interest rate (zero).
How much you need to save will be, of course, specific to your particular business situation and business model. It took around 18 months for my husband and me to save what was required for us to open our wine store, which was achieved with a combination of saving bonuses from our commission-based sales jobs and scrupulous frugality.
It’s not always fun, but neither is giving away your profits to the bank. Just design your initial business plan (keep it tight) and start saving in whatever way you can. Trust me; you’ll thank me in the end.
2. Do a job yourself before hiring someone to do it for you
It was 3 years before my business hired a part-timer.
It was 6 and a half years before we hired a cleaner.
We, and a few helpful family members, redecorated before we opened. I sewed seat cushions, assembled shelving units and tiled a counter.
Did we do a perfect job? No. Would the place have looked better if we had a design consultancy create a ‘vision’ for the space? Absolutely. Did one customer get red paint on his very expensive white shirt from the barstool I decorated with the wrong kind of paint? Erm, yes.
Did it matter to our customers? Not a damn bit (apart from the aforementioned customer.)
They still came, they still spent. Doing everything ourselves, especially at the beginning, meant lower expenditure, which enabled us to turn a profit in our first year. The average company won’t make a profit for two to three years.
There’s a somewhat inaccurate perception that once you become the boss, you need to act like one, which means you don’t do the dirty work or anything that’s ‘beneath’ you. But if you scrub that toilet, clean that floor, restock those shelves yourself, you are giving yourself the chance to remain a boss for far longer.
3. Rent, don’t buy
Our obsession with ownership needs to stop. If you want your business to be free of debt, buying is not always better. A few pertinent advantages to renting over buying include:
No maintenance costs.
The flexibility to scale up or down.
No depreciation.
It could be something fundamental, like renting a store rather than buying a unit. Or it could be small, like renting an air conditioning unit only in the summer months.
The best bit? Cash flow, my friends. Not tying up thousands of dollars in equipment, mortgages or maintenance means a) more money in your pocket and b) less money in the bank’s pocket.
4. Don’t buy until you really need it
The day we told my husband’s parents that we were opening a wine store, they told us to buy a van. ‘It’s not just useful, it’s also a mobile branding unit, you’ll make your money back in no time!’ they said.
We told ourselves that we’d buy a van when we needed to. That day never came.
For 7 years, we ran our wine store, complete with local delivery service operated in our 15-year-old Renault Clio. By not buying or leasing a van, we saved ourselves around $50,000 — a large chunk of change.
Too many people buy what they think they need before they even start making a penny. But how do you know? Perhaps you can get away without that piece of machinery for a while. Perhaps you don’t need a fancy office, just a kitchen table.
Patience is key. Wait, assess and see. You may be surprised about what you can get away with not buying and for how long, all the while watching your bank account getting healthier and healthier.
5. Borrow, barter and trade
My butcher had expensive taste — he liked Champagne and brandy. And I like steak.
The guy who owned the coffee shop next door liked craft beer. And I like coffee.
So we traded. I got my coffee and meat at the cost price, and they got the same. Everyone won, and everyone saved money.
There are countless ways you can barter and trade to get what you need for an incredibly low price, or even just your time. If you want an office for your website design agency, perhaps the local co-working space needs a new website. Need a piece of machinery for a short while? Who has that machinery? Could you borrow or rent it when it’s not being used?
It pays to be part of a community. Make friends with those in a similar field to you and see if you can share equipment, trade skills or knowledge. Have you got customers with a skillset you need? See if you can exchange your trade for theirs.
Bartering has been around since 6000 BC — far longer than modern business practices — and with good reason. It works, and it can help keep your business debt free.
All too often, business startup costs are the wrong way around. We create a plan, work out what we think we need to begin and get a loan for said amount. Just so we can look like we know what we’re doing, so our store looks perfect, so we have every tool we may ever need for a job that may or may not come our way.
But there is nothing wrong with starting small, with doing it yourself. Gary Vee says it best:
“Even if your ambitions are huge, start slow, start small, build gradually, build smart.”
Park that ego, save your money, take your time and remain debt free, your business and your peace of mind will thank you for it.
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