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I heard recently that a friend of a friend wanted to start a product business and they planned to go in debt to start this business.
I don’t recommend going into debt to start a business. A lot of people say you should, but I don’t think that you should.
I don’t like owing people, I don’t like buying things I can’t afford, I don’t like living outside my means, and I’ve never operated my businesses that way.
I’ve never operated my businesses with debt, and I don’t think that you need to either.
A lot of people assume if they want to start a business, they have to go into debt because they don’t have the equipment or the inventory.
What’s better than going into debt for something is building up capital yourself, saving the money, and investing in your business.
Invest in products. I wouldn’t recommend going into products as the very first thing that you do, because products are a long-term investment. To produce products, you have to buy large runs of things and it can get very expensive. Eventually, it will become profitable and you can make your investment back, but it takes a long time.
If you want to build a big product business, even when you get profits back, you need to reinvest those back into the business. Starting a product business is already hard, but then when you put debt on top of that you are now in the red.
Success Isn’t Guaranteed
You don’t have $500 in your bank, you have $10,000 of debt and a net worth of -$9,500 dollars. The same is with your business if it’s in the red. You make money, you break even, and now you’re not even profitable. Now you have to pay off that startup debt.
A lot of people think, “Oh, but debt is good. You can get where you want to go faster.” Yeah, but all of this is predicated on the assumption that the business will be successful. The reality is that most businesses fail.
50% of businesses don’t live beyond 4 years.
They don’t last beyond 4 years, yet you’re borrowing tons of money to start it in the first place. What if almost half of cars broke down within 4 years of buying them? Do you think it’s a good investment? Do you think it would be wise to borrow tens of thousands of dollars to start something that has a 50% chance of failing by the 4th year? It’s not a guarantee.
Business success is not a guarantee.
When people recommend borrowing money to start your business, it’s all based on the assumption that your business will be successful.
What if you get hit by a car? I hope that doesn’t happen, but you have to realize if something happens to you, you decide you don’t enjoy doing this anymore, or you decide it’s too hard, it’s too late. You owe money. You are stuck.
You have obligations, liabilities, and payments that you have to make. It’s too late. People act like it’s smart to borrow money to start a business. It’s not smart. There is no guarantee.
Not only do most businesses fail and 50% of businesses will not make it beyond their 4th year, but you’ll have the cognitive overhead and stress of payment obligations and liability.
If you find you don’t like doing it or the business isn’t successful, it doesn’t matter. You can’t get out because you have this obligation.
You have this liability and this debt. You may have to file for bankruptcy because there’s no other way to get out of it. Yet, people give this advice all the time. They just take it as a given that you go into debt to start your business.
Debt Isn’t Required
I recommend starting out just working with clients. Save some money, live simply, build up your own capital, and then invest in inventory. Start your business in the black.
Start your business from $0 and build up rather than digging yourself in a hole that you have a 50% chance of getting out of in the first 4 years.
I want you to look at the lives of the people giving you this advice. Who’s telling you that you should go into debt to start your business? Look at their life, look at their business. Are they themselves in debt? Are they cashflow poor? Are they asset poor?
In most cases, I bet they are. I have six figures in the bank, I’m running a profitable business, and I have never been in debt—not personally and not for my business. That is the standpoint from which I am giving you advice.
I want you to audit the people who are giving you this advice, the people saying you should go into debt. Look at their lives, look at their business, and ask yourself if you want the same.
You are either the master or the slave—you own your life or you owe your life.
It’s the same in business, you’re the master or you’re the slave. You owe your business or you own your business.
Don’t go into debt to start your business. Don’t owe your business, own your business. I’m harping on this a lot because this concept is important and it pervades your personal life.
The way you operate personally pervades your business and the way you operate your business. You need to assess how you are approaching things.
You’re wanting to build an asset, right? A business is an asset.
Don’t acquire liabilities to build assets.
Work toward getting rid of all of your liabilities. Get to $0 and break even, then build assets on top of that.
Make it your #1 priority to get rid of all your liabilities, payments, and debts, and then build assets.
Don’t fall into the trap of acquiring even more liabilities, debt, and going into the red just to build your business.