A few years ago I was visiting with a friend of mine who was getting close to retirement age. In fact, at this moment, he’s gallivanting around somewhere off the beaten path having a good time with his wife. I think they’re scheduled to return in about a year.
He’s always had a great job, lived in a nice, but modest home, and was very comfortable. In the middle of the conversation, he talked about a windfall that came in the form of an inheritance several years earlier. “I decided to pay off the mortgage on my home,” he said.
Most of his friends and colleagues at the time thought it was a stupid idea. Mortgage debt was good debt. They advised he should take the proceeds, invest them in the market, and make a lot more money than he would by paying off his home. “Ty, do you have any idea how much you need to live on if you don’t have a mortgage?” he asked. “Next to nothing,” he said.
I personally don’t think debt is a bad thing, and I can’t tell you whether or not he would have done better taking that windfall and investing it all those years ago, but after 20 years, he was still happy with his decision.
Surfing around looking for inspiration this morning, I stumbled upon something J.D. Roth wrote on Entrepreneur.com last December.
“I don’t like debt,” he writes. “For nearly a decade, I’ve written about personal finances, both my own and those of others. And too many times I’ve seen how debt can act like a cancer, draining life from healthy bank accounts.”
I’ve shared before how my Dad looked at debt in his business—using a line of credit to smooth out a cash flow crunch was the exception rather than the rule. In fact, I’m sure it happened from time to time, but I don’t ever remember him mentioning it.
Although he didn’t know Roth, judging from the way he approached business debt, I’m sure he would have agreed with him. “Borrow only what you can afford,” writes Roth. “Avoid the temptation to borrow more than the absolute minimum you need, no matter how much you are qualified for.”
Personally, and as a business owner, there have been times when I’ve done better at this than others. Like many small business owners, I’ve succumbed to the lure of an extra $5,000 or $10,000 once or twice. Unfortunately, when I did my forecasts, I didn’t always include the extra debt burden of the extra cash and when my optimism was greater than the reality of the situation, it wasn’t pleasant.
I’ve talked with many small business owners who need borrowed capital to grow—and debt can also be leveraged to seize the moment and take advantage of a unique opportunity to push your business to the next level. But remember, as Roth suggests, “The best debt is one that has been repaid.”
My advice is to never consider credit cards or other high-interest forms of debt to be anything other than a short-term financing solution. Although there are numerous success stories of entrepreneurs who leveraged a wallet full of credit cards to get his or her business off the ground, there are just as many who did the same thing propelling themselves to financial ruin.
Roth argues keeping your business debt-to-revenue ratio at about 20 percent. I think that’s good advice.