What should you pay cash for? What should you finance?

[hanks75]

A healthy company should have a mix of debt and equity. My question is what expenses should be financed, net 30'd, or paid in cash. What debt is considered good debt? What kind of debt is a death trap or just plain ole stupid??

 

[Brian R]

A healthy company should have a mix of debt and equity. My question is what expenses should be financed, net 30'd, or paid in cash. What debt is considered good debt? What kind of debt is a death trap or just plain ole stupid??

2 revolving credits and one installment loan.
which is 2 credit cards and 1 vehicle loan. Finance real property of course.
Everything should be financed, but most should be short term.
The only way to have credit is to get credit and use credit. Do I need to say wisely?
Net 30 only helps you in a pinch...it does help with cash flow but that's what credit is for.

 

[rhyde]

never finance meth, blow, smack, weed & hookers



Only finance to fund a specific projects and keep debt to capitol under 20% I've always been able to fund capitol construction & expansion out of pocket my business has zero debt right now

 

[Ken Snow]

I kind of go the opposite way of Randy- finance everything possible esp when cost of funds (COF) is cheap. Use vendors as short term financing from 30-90 or more days same as cash (or get cash discount), pay all the consumables you can on credit cards both to add additional time and to accumulate rewards (always pay them off in full each month). Finance all capital expenses for as long as possible at as low an interest rate as possible and with no money down.

Ken

 

[rhino1]

I wonder why anyone would actually want to go into debt in this business if you don't really need to?

I can think of several times in the last 3 years where I would have went under if I had a debt load to service. I can think of a ton of crap I would have bought that I would not really need and would be sitting around if I just ran out and got a loan when I wanted something.

This doesn't apply to a large business like Ken's, I have no glimmer of what it takes to run a show like that. For an owner/operator starting out I wouldn't finance anything I didn't need to. Make damn sure you really need what you buy and don't get sucked into the latest bulletin board toy.

If you insist on spending money you don't have, spend it on marketing... whatever that means to you. Advertising, freebies, etc.

 

[rhyde]

dang Ken,.. no one out here finances meth, blow, smack, weed & hookers!



Ken your business is a different animal I'm sure you have a full charge accountant/book keeper possibly even a CPA keeping everything in order your 30,60,90's are paid on time

I believe this guy is new and the concern is he starts business acquitting debt and using credit lines to run a business to pay himself, purchase chemicals,
perhaps it's slow so he make the minimum payment a few times or the first year it doesn't take long and a guy can write out monthly payments to credit lines more than the cost of a shinny new vortex I've seen it happen in and outside this industry it's very common in restaurant startups

 

[daniel@procarpet]

I think the best answer would be to have the cash in a safe account and finance if you can get low rates. You still have the cash on hand to pay things off when you want, but you also have the flexibility to put the cash towards other things. If you don't have the cash to pay for a 50k dollar truck, then do not finance it. It is that simple. I agree I wouldn't want to be in debt for real. That is a recipee for disaster imo. Then again some people can do wonders with a small business loan.

 

[rhyde]

I wonder why anyone would actually want to go into debt in this business if you don't really need to?

expansion, maintain operating capitol. Ken's reason is valid i just don't think it applies unilaterally to small business.

A simplified example Hagopian sells rugs and wholesalers often make deals like buy 100K of rugs and we will consign you 100K worth of rugs 200K of inventory for 100K. Ken could use a biz credit line say @ 9% or he could use cash offset by local vendors 30,60,90 extend out the payment thereby paying little or reduced interest..... this has also put some small rug dealers out of business.

 

[Ken Snow]

ACTUALLY THE HANDKNOTTED RUG DEALERS WILL FINANCE 0 INTEREST THE WHOLE THING FOR 12 MONTHS AND CONSIGNments are usually with diff vendors than purchases. Overseas purchases are always prepaid so line of credit is needed to make significant purchases.

We actually run our retail and service bussinesses separatelt, both of whom have acct departments. Our CFO oversees both and there are 3 people in my acctg dept plus a part timer. I make all payables decisions though which I believe is critical. Only the owner in a small to medium size bus should decides who gets paid when.

I actually agree with what you said for the most part Randy~ I was just goofin.

 

[Steve Toburen]

Use vendors as short term financing from 30-90 or more days

Ouch, Ken. That is just the sort of thing Papa Nick hates to see!

Steve
SFS.JonDon.com

PS Actually, Ken, I agree with everything you say above. (I get several round trip DR tickets a years out of my credit card spending- which is paid in full every month.)

Even as a start-up I found PRUDENT borrowing worked for me as long as I was POSITIVE the new equipment/ marketing/ whatever would more than repay the loan payments. Sure, you can do it out of cash flow but it will take much longer. Like everything else, it all depends ...

 

[daniel@procarpet]

Ken how did you get to be so smart?

Did you get a business degree/MBA, or did you just learn over time what works?

 

[J Scott W]

I am with Ken and Steve, put the day to day expense on credit cards. Collect the air miles or whatever rewards. Pay off each month before any finance charges come along.

It makes sense to finance long-term investments with long term financing. If you purchase a building for your business,paying cash would wipe out your cash flow. Finanace it over 20 to 30 years at low interest rates. Same thing for vehicles or equipemnt. Finance for a few years less than you expect to use them.

If you keep vehicles 7 years, finance for 5. If you keep a vehicle 5 years, finance for 3. Same logic for truckmounts.

Most bsuiness need their cash flow. PAying out large amounts at one time makes the cash flow a rooler coaster. Monthly payments helps even out the flwo.

Don't buy what you can't afford or don't need, but make wise use of the current low interest rates.

 

[Ken Snow]

I agree Scott with the Caveat of using the length of time for the item to depreciate. In the example of vehicles (including direct drive or PTO systems) 5 years. Major equipment might be 5, 7 10 etc. and building as long as possible.

Daniel, most of my learning has been through good mentors, lots of hard knocks and reading business books. I do not have a business degree, but my family has a long history of CPA's and accountants so numbers always came naturally to me. Unfortunately I barely know which end of a screwdriver to use.

Unless you fly many times a year there is no reason a carpet cleaner should ever pay for a ticket. Use reward credit cards for everything~ just make sure to keep personal cards separate from bus cards & link the rewarda accounts when possible.

 

[Jim Williams]

I say debt free is the only way to go. Most Americans don't have the discipline to pay off their credit cards every month. They are of the mind set that they will be making more money later and will pay it then. If you play with snakes sooner or later you are going to get bit.

I sure wouldn't want a van and truck mount payment in February or March. To me the added stress is not worth it, but that's just me. Others may not mind the stress of owing money.

A friend of mine in the self storage business bought into the using somebody elses money philosophy borrowing over one million to expand, then when the economy turned he is close to bankruptcy.

 

[Ken Snow]

I am talking business people, not most people. Everyone has to decide for themselves what level of risk tolerance is acceptable to them and how they can handle not only credit card debt (bad debt) vs capital investment debt for vehicles, equipment etc. (good debt imo) And don't forget a lease is a debt like any other, just usually more costly than term debt.

Ken

 

[tmdry]

Everything in my business has been paid for, including van.

Financing is what's keeping me from expanding.

 

[Brian R]

Everything in my business has been paid for, including van.

Financing is what's keeping me from expanding.

I seriously doubt that. Financing has helped the largest companies in the world. Some experts say you can't expand without financing.

 

[Ryan]

I say debt free is the only way to go. Most Americans don't have the discipline to pay off their credit cards every month. They are of the mind set that they will be making more money later and will pay it then. If you play with snakes sooner or later you are going to get bit.

I sure wouldn't want a van and truck mount payment in February or March. To me the added stress is not worth it, but that's just me. Others may not mind the stress of owing money.

A friend of mine in the self storage business bought into the using somebody elses money philosophy borrowing over one million to expand, then when the economy turned he is close to bankruptcy.

Show me one fortune 500 company that did it on a debt free motto. Debt is leverage, and it is damn near impossible to run a business with out it.

 

[joeynbgky]

Do you know how hard it is to get financing for my business? I have not been in business long enough they say.. My credit score is in the 730 range not bad at all. Everything I have is paid for nothing financed.. Except my new car. and I put 9 grand down. All business vehicles are paid the for and so are the tms.. IF I could get a business loan I would get another TM and expand, but financing is holding me back...

 

[boazcan]

I say debt free is the only way to go. Most Americans don't have the discipline to pay off their credit cards every month. They are of the mind set that they will be making more money later and will pay it then. If you play with snakes sooner or later you are going to get bit.

I sure wouldn't want a van and truck mount payment in February or March. To me the added stress is not worth it, but that's just me. Others may not mind the stress of owing money.

A friend of mine in the self storage business bought into the using somebody elses money philosophy borrowing over one million to expand, then when the economy turned he is close to bankruptcy.

Show me one fortune 500 company that did it on a debt free motto. Debt is leverage, and it is damn near impossible to run a business with out it.

Well William Ryan Gates, when are you going to take the world over cleaning floors? That is a statement of a younger generation that has grown up seeing mom and dad financing everything including their mcdonald's lunch. Debt is much more than leverage. It's other side is risk, stress, cash flow, stress, financing charges, stress, adjustable rates, stress, closed credit lines at bad times, stress.....

KISS - no one is building an empire here other than Ken who is maintaining one. Your life will be much more enjoyable to take it slow, grow as you can with as much cash as possible. Cash negates a lot of ills - like a slow or bad economy for one.

To each his own.

Your truckmount cleans better when it is paid for :!:

 

[Steve Toburen]

I say debt free is the only way to go... To me the added stress is not worth it, but that's just me. Others may not mind the stress of owing money ...

And there you have it. To each their own. On the other hand, I actually welcomed the pressure of MODERATE debt payments because they pushed me to get out of my comfort zone and to get out there and sell. "But that's just me."

IMO, the decision is about more than whether to owe money or even your peace of mind. It comes down to "what do you want to be when you grow up". If you want to stay small and enjoy the stress-free life of a highly paid owner-operator (nothing wrong with that!) then debt-free may be the way to go.

However, if you want to create an appreciating asset out of your business by expanding it will be very difficult and require a much longer time curve without responsible use of business credit. So it really is more about what your Life Goals are- not just about borrowing money.

I also think in this thread I think it is important to make a distinction between a) business loans/leases, b) long term personal borrowing to buy physical assets and c) frivolous spending financed by credit card debt/in-store financing. Here's my philosophy ...

a) Personally I borrowed and easily repaid lots of business loans, including the ten year note for our 6,000' warehouse in the mid-80's at 13%! OUCH! BUT that same warehouse let us dramatically expand our services, we tripled the size of our business and I easily paid the note off early in five years with my increased profits. Today the warehouse is free and clear and has been very profitably rented for the last 17 years. Could I have scraped together the funds back in 1984 to have paid cash? No way!

b) Same thing on buying houses/rental properties and vehicles using responsible credit. If I has not bought my first house on credit I would still be renting! (And with a very low net worth.)

c) Credit card/ in-store financing for consumer debt? NEVER! Seriously. In Sioux's and my 35 years together we didn't even have a credit card for the first five years. We bought all of our first home's furnishings used for cash at yard sales. And yep, we still buy lots of stuff used- now not just to save money but for the "game". (OK, to save money too!)

IMHO, Americans now have become the "Entitled Generation" as in "I deserve to eat out five times a week" or shop at GAP or buy a new SUV every other year even if my outgo exceeds my income! Sioux and I are still of the old-fashioned notion that if we can't buy a 52" liquid plasma TV and pay it off at the end of the month we just don't buy it.

So just to sum it up it is important to differentiate between longer term borrowing for physical assets versus financing short term foolish spending with borrowed funds. Money and debt is an emotional subject and each family needs to make their own decisions. And thanks for letting me vent about the "Entitled Generation" thing!

Steve
(Happily debt free now for over 15 years.)
SFS.JonDon.com

PS Joey, if you are serious about financing to expand you might give Mike Cushing a call at Jon-Don in Chicago. He has some very "creative" but non-Mafia sources. 800-400-9473.

 

[Ken Snow]

Thanks Steve~ you said what I was trying to say, only much more eloquently.

 

[Hoody]

This is slightly off topic but I think it goes with what is being said in this thread. A lot people enter this business because they can see the profitability in it. The problem is not everyone has the greatest credit. My credit is not horrible(at one time it was) but its not great either.

At one time I had a low 400 credit score. When I was 18 I got credit cards, bought cell phone plans and had my friends on them, and of course you guessed it - they lost their job and I got stuck paying the bill. Got in over my head and just couldn't keep up with it anymore.

What I did was look for a secured credit card/line of credit. It is basically a debit card with an initial $250 line of credit. You deposit the $250, use the card, and either every month or every two weeks you make a deposit to bring the available balance back up to $250. After 6-9 months if you have been depositing money on it monthly, they usually give you and $500 line of credit. Every two weeks I would bring the balance back up to $250, and when I received my $500 limit card, I would deposit monthly. I used this card to pay off my debts, the ones that didn't charge off my debt atleast. You don't HAVE to deposit on it monthly, but it looks better as a line of credit. This is a good option if you have bad credit and are denied from an actual credit card. After the $500 the can issue you a $1000 line of credit, but I never applied for that. Some may be in the position to have the card. I brought my credit score back up to the low 600's. Not great, but I can apply for some loans now with a co-signer, or even very few loans by myself - though I'm not in the position to do that.

Another option is to look for grants. Free money to you. Find a grant writer, and explain what you're wanting to do, have a business plan in hand to show them. I know in a lot of states there are grants available for single parents. I am not married and have a 10 week old son, and I found I'm able to get a grant for $10,000 for a new business start up. You can buy a small used machine and used van, and still have some left over with $10,000. There are also grants available for military vets, disabled(or have children that are disabled), and many other things you just have to look hard enough.

 

[Ryan]

Or you could just pay your damn bills on time hoodie

 

[Hoody]

If only I knew then what I know now.

 

[Steve Toburen]

What I did was look for a secured credit card/line of credit. It is basically a debit card with an initial $250 line of credit. You deposit the $250, use the card, and either every month or every two weeks you make a deposit to bring the available balance back up to $250.

What Steven is describing may work well with a reputable company. But I have a friend with a daughter (who is struggling) that ran across a credit card issuer called "First Premier". I googled them and I have never seen so much hate against a company in my life.

It cost my friend's daughter (well, actually my friend paid it off) over 350.00 to get her out of a credit card that she made one charge on of less than 50.00!

Steve
www.SFS.JonDon.com

PS I'm not saying that Steve's tactic here won't work. Just be very careful.

 

[Hoody]

http://www.SFS.JonDon.com[/url]

PS I'm not saying that Steve's tactic here won't work. Just be very careful.[/quote:39uds1sq]

Thanks for that Steve! I failed to mention there are some that have fees. Be sure to read the fine print, but there are also some that don't charge them. When you are done using the card, you need to contact them in writing informing them you no longer have use for the card. On your credit it will then look like a line of credit that had payments made to it, but was then paid off. If I can remember/fine the card that I had used I will post it.