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Posted by A. B. Dada on January 23rd, 2006
100% of my businesses that failed (except for one) did so due to cash flow problems. Cash flow will be an article I cover at a later date, but the biggest failure in cash flow is due to debt management. Nearly 100% of HUGE businesses I’ve seen fail in recent years has also been due to excessive debt to cash ratios. It is so bad that I made a promise last year to never use debt to expand my businesses ever again.
Almost everyone who is promoting entrepreneurship is pushing ways to get extended lines of credit. The old adage is “you can’t make money unless you have money.” I strongly disagree with this cliche, my belief is that you can’t build wealth unless you have wealth. What is the difference between money and wealth? Money has many sources, and sometimes having money means not having wealth.
Wealth, to me, is how much money you have above and beyond all your debt and short term expenses. This money can be in the form of equity in your home and car, jewelry, stocks, 401Ks and cash. The more liquid that money is (easy to convert to dollars), the more stable your wealth is.
I’ve previously told you to get rid of as much debt as possible before starting your own business. The key reason for this is to maximize your wealth to give you a stability that having perfect credit can never offer. I have seen dozens of business owners go from having millions in income to being bankrupt within 2 years. I have never seen a wealthy person put good money into a bad business.
There are many offers for business credit cards and business loans. All of these business credit lines that you’ll see available will also ask for a personal guarantee. Check it out — find a few offers for business loans and check the fine print. Banks don’t have faith in business anymore, but they’ll be happy to take your house if you don’t pay them.
Business credit that is only tied to your business’ assets is the only way I recommend taking a line of credit, and only if you have guaranteed work to buy the assets you purchase in a short period of time. Getting business credit without a personal guarantee can take years (about 4 years in my experience). Getting a business credit card in your own name takes 3 minutes online, and can ruin your business just as quickly.
There are some that recommend borrowing from friends and family, but I am not a fan of this either. I’ve found that the best way to build solid wealth and a solid business is to start very small — know what the bottom looks like and you’ll be a more cautious businessman when things start growing. Jumping feet first with fists of cash is not going to teach you how to maintain a stable cash flow. Primarily experience (and hopefully my near future article) will give you that knowledge.
When it comes to business credit, just say no if they ask for personal guarantees. There are thousands of businesses you can start with very little capital. If you don’t have access to a lot of cash laying around, consider another business or consider working 3 jobs for a year to build it. If you have a pile of debt, your primary goal is to pay it off as much as possible in the next 12 months. If you’re relatively debt free and you have saved a little, you’re almost there.
Credit is a killer — and as we’ll soon learn in this country, those who don’t use and abuse credit will likely be the ones who come out on top when we hit the regular recessions as we have a few times in the past 20 years. Be prepared now, though. As the economy slows and businesses fail, opportunities will appear everywhere for those of you who worked hard to be debt free and prepared themselves to take advantage of the mistakes of others.