Is Debt Ever Necessary? (Or, How to Anger All Your Friends)

Warning: This post has only been mildly proofread. It’s my “gut reaction” to a few conversations on debt over the last two days. It’s not nearly as polished as many of my others. Don’t say you haven’t been warned.

This post has been rolling around in my head for a while. I didn’t plan on writing it yet – partially because it’s a sensitive topic and partially because it’s difficult to be thorough and brief. Not impossible, just difficult.

On Thursday, I was talking with my oldest friend when the topic of debt came up. I told him that I believe any business could be started and operated without debt. He disagreed and it started a fun and challenging dialogue about “responsible borrowing.”

That same evening, I was talking with my wife Lisa at dinner recounting the conversation when I said, “Debt is a tool of the impatient person.” We talked about that for a while and I stand by my statement. (She agreed with me, in case you’re wondering.)

Today, I tweeted that statement out and heard about “responsible debt” again from a business perspective along with it being an “effective” tool when used responsibly.

Finally, my friend Amber asked what Dave Ramsey would say about Kiva.org – the micro-lending site that allows ordinary people in wealthier nations to help those in third-world countries by loaning them small amounts to start businesses. I told her I didn’t know (which I don’t) – nor am I really concerned about it.

My stance on debt and finances, while certainly informed by Dave Ramsey, is my own. It’s been molded from my own experiences and background and it has evolved a lot over the years. I met him once for 30 seconds. Kiva never came up.

So let me try to tackle these points.

Is Debt Needed to Start a Business?

The short answer: no.

The long answer: no.

“But what about…” Look, I’ve heard a lot of these questions. One of the more common ones I get is about restaurants. Opening a restaurant takes a lot of money. The average is about $125,000. Most are likely financed. I have no statistics on this – it’s a conjecture, but I’d bet I’m right. Anywhere from 60-90% depending on your source will close in the first 5 years.

Here’s the deal: if you take out a loan to start a business, you will have to personally guarantee the loan. Which means, you will be borrowing against your family’s well-being and putting it at risk for a business. If your business goes under, creditors have rights to your personal assets. This is bad. Just ask anyone who’s gone through bankruptcy after borrowing to start their business.

Would You Borrow Money to Invest in the Stock Market?

If I came to you and asked if I would be wise to take a home equity line on my house at a rate of 7% to invest it in the stock market which historically returns 10% or more in the long-term, what would you say?

I hope you would tell me I’m an idiot.

Investing in the stock market is investing in businesses. When you buy shares of a company, you are investing in that business. So it is when you’re starting a business. You must invest capital to start a business. So, should you borrow money and leverage your personal assets to start a business?

I’d argue the answers are the same.

Debt is a Tool of the Impatient

There. I said it again. I still stand by it.

Let’s go back to our restaurant example. The argument makes a faulty assumption that the only way to open a restaurant is to open a restaurant in one step. To go from “I don’t own a business” to “I now own a fully operational restaurant” in 6 months. If you take that view, then you will need $125,000 over the next 6 months (if not more). There are only three ways to get $125,000 (legally):

  1. Borrow the funds
  2. Get investors
  3. Save up the money

While I used to be, I’m no longer a fan of legal partnerships. I’d prefer to maintain 100% control. But how do you save up a $125,000? You bootstrap it.

Here’s an example of bootstrapping a restaurant:

  1. Save up $10,000 while keeping your day job. At night, start building up a killer short menu. Test out your recipes on friends and family who will give honest feedback.
  2. When you have some money saved up, offer to cater a friend’s wedding who’s looking to save money. Use your previously created menu as the starting point. Use your $10,000 (or whatever the actual number would be) to hire a few servers for the day – or recruit family.
  3. If it’s well-received, start connecting with local party planners, party supply rental companies, etc. Tell them about your services and create joint ventures with them to refer business.
  4. Save and invest back into the growth of the business but only grow as fast as you can manage without debt.
  5. Live on less than you make. (Shocking, I know.) I’ve tried it the other way, it doesn’t work for long.
  6. When you have some money saved up (let’s say $75,000-$100,000), try to find a failing restaurant in a good location. Structure a great buyout deal.
  7. Invest as little of your money as you can to refurbish the restaurant and get it running. Invite EVERYONE you’ve ever catered for opening night.
  8. Rinse and repeat.

Now, I’m not in the restaurant business. I’ve been a waiter before – and a pretty bad one at that. Obviously, there are steps missing in my sample plan. That’s not the point. The point is that is can be done. It just takes patience.

“But I don’t want to open a catering company.” That’s fine. You’re not patient. I get it. Go get a loan. Just don’t tell me it can’t be done.

So, how patient are you?

Bootstrapping is More for “Lifestyle Businesses”

Tell that to Cisco. The company is valued at $131 Billion (with a “B”). And, according to USA Today, the company has never had any debt since the inception of the company. Building a business debt-free is possible – regardless of the type of business.

My Thoughts on Kiva.org

Crap. This is going to tick some people off. Or a lot of people.

If you live your life by a set of principles, then you have to ask if those principles are black-and-white or if they’re guidelines. Things rarely fit neatly into a black-and-white world. After all, the world we live in is broken. But that’s a post for another day.

If you don’t know what Kiva is, it’s a micro-lending company where those in third-world companies are loaned money to get a small business started. The average is about USD $380. Not a lot to us, but a lot to them. You can pitch in as little as $25 toward their fundraising goal and the site a has a repayment rate of nearly 99% – an astounding figure.

Let me start by saying that my thoughts on Kiva are directed by this principle:

“The rich rules over the poor, and the borrower is slave to the lender.” Proverbs 22:7

Our faiths guide our worldview. So, if I look at this statement, what am I to believe? If I loan someone money, am I putting myself in the position of slave master? I’ve answered this for myself in the affirmative. Why? Because I’ve been on the other side and I was a slave to creditors and it nearly ruined me.

Separating the Mission of Kiva from the Method

I love what Kiva is trying to do. I’m a big supporter of their mission to end poverty. However, I have to ask myself if the method of putting people into debt is the right way or the best way to do this.

An interesting statistic that I’ve not been able to find on Kiva’s website is the success rate of businesses that have received money from Kiva loans. There is a difference between repaying a loan and running a successful business. They readily reveal the lending stats, but I’m not sure those are great measurement for success of any business other than their own (and the people loaning money).

The problems of poverty are huge and won’t be solved by this post. There are a lot of great organizations trying to fight it on different fronts. Many people have given money to Kiva. They are not bad people. The people running Kiva are not bad people. The people borrowing money from Kiva are not bad people. I’m merely calling into question the method.

I love the idea of helping people start small businesses in third-world countries. After all, I’m an unapologetic capitalist. But is the problem their lack of funding or is it a lack of education in basic financial principles?

Does the ability to repay a loan makes someone suddenly capable of making sound financial decisions?

Your Turn

Now that I’ve managed to anger a large segment of people, I’m going to stop and turn the blog over to you. The comment section is below. Have at it (or me). I will respond to everyone.

By the way, if you want to win 30 minutes on the phone with me to talk about goal setting or to yell at me for these viewpoints, read my post on How To Set Better Goals. You still have a little bit of time left. ๐Ÿ™‚

Image credit: iandavid

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  • Does this approach extend to mortgages, or is that a special circumstance?

    • Great question! I’d argue that debt is debt regardless of what you call it. I’ve had multiple home loans. We’ve made the choice to rent until we can pay for a house with cash. Will it take longer? You bet! Is it possible? Absolutely!

      Patience is underrated. People used to by homes with cash all of the time.

      Love the question! What do you think? Are there, or should there be, exceptions? What criteria do you use to make the decision as to what fits?

      Thanks,
      Travis

      • I suppose the difference being that you’re borrowing to buy the asset upon which that loan is then secured; at that, an asset which does not depreciate in the traditional sense (unlike business CapEx, cars, 50″ plasmas, etc.)

        Whilst that does not totally mitigating the risk it does provide some protection should you not be able to service the loan. A bad situation, for sure, but comparable to not being able to pay your rent, you might say. Certainly I can see benefits of having your equity (either in the house or your savings account) not tied up in your living arrangements.

        I don’t doubt it is possible to save to buy a house with cash, however I think it comes down to this: How much of a risk is a particular debt on your financial situation and what risk are you willing to bear? I guess it’s a sliding scale and you’re certainly on the risk-averse end of that, judging from this post at least.

        I’m reluctant to borrow to pay for much of anything these days, however I’m comfortable with my mortgage, have enough equity in the house to ride out bumps in the market. I guess I’m saying not all debt is made equal, and some is more worth the risk than others. Is that fair?

        • Great points, Adam! It’s an argument that most people make about home loans is that (usually, over the long-term), the value of the underlying asset (the house) will go up.

          It is definitely a risk/reward question and a personal call. I don’t think people who have home loans are making a bad decision, by the way. I think you have to look at the case-by-case to determine, whether it’s bad. If you have a home loan payment that is less than 5% of your take-home pay, is that risky? Probably not.

          My point is only that calling debt a “necessary” tool for doing things is dishonest. It’s not a necessity. It’s simply that, when we do, we make a value statement that any risk we assume is less concerning to us than waiting any longer to get what it is that we want.

          That’s part of the reason we had the financial meltdown. Everyone likes to blame the banks, but there were people on the other side of those loans who made poor decisions. They weren’t bad people. They just made a bad decision. I was one of them. We were blessed to sell our house in CA at the peak of the market, right before the crash or we would’ve ended up bankrupt.

          Love your thoughts!

          • I can totally agree that calling debt necessary overstating the case. It goes back to your initial point. It is for the impatient, in that it is expedient. If I can have paid for my house, worth x, quicker by borrowing than by saving, without a significant financial risk then avoiding that debt has a cost.

            I think it’s about an awareness of the consequences of the decisions you take; knowing what signing those mortgage papers actually means, and indeed being conscious of the costs of deciding *not* to borrow. If you go either way with open eyes then I don’t think there is better or worse, just a decision made.

            One thing which did occur to me just now, debt as an enabler when time is of the essence. If you don’t have the resources in place to capitalize on an opportunity then debt can be a possible option to allow you to do so. Again, with more risk, which is why Apple and Google have their war chests (mentioned elsewhere) but I would still say that, if you are aware of what you are getting into then not always the wrong decision.

            Excellent food for thought though, thanks for posting this.

  • Kurt Rayners

    Travis,
    Correct me if I am wrong but one of your first jobs was actually taking calls for a debt consolidation company, correct. Not sure what your other jobs were since that one, but I was wondering if you have in fact started your own business without a loan and made it successful. If that is true, then you can rest in the fact that YOU have done it and made it successful, so therefore you have a leg to stand on. As for the Cisco argument, that is not really grounded, because Cisco built itself on Equity not debt by conducting massive equity offerings to the public to raise capital, hence no need for a leveraged debt position.

    • Thanks for jumping in, Kurt!

      You’re correct. I worked for 4 years as the CTO of a debt negotiation company. It had the goal of helping people get out of debt. Not sure where the problem is as it pertains to this post.

      As for whether I have started a business without a loan, the answer is yes. I’m doing it right now. As for it being “successful” – I would ask you to define “successful.” I am currently in the start-up phase and bootstrapping the building of the company. Will I be successful when I hit $1M, $10M, go public (which I have no intention of doing), etc.? What’s “successful”? It’s still running. It will take time to determine “success.” I have my metrics and a vision of what that will look like.

      As for my Cisco argument, it’s perfectly valid. I made no statement on the raising capital by selling off part of your company (not debt). It’s a legitimate way to raise funds and it’s not debt. My statement was only on whether I believed debt was required to build a business. Cisco is just one example that it isn’t. They are $131B company that did not borrow money according to USA Today.

      Great fodder for discussion!

      Travis

  • Travis – great article. You’re points are all valid and true. I think judicious use of debt depends on the situation. Cisco may not have any debt (nor does Google), but you can believe that they did at one time. Ok, maybe not Google, but that’s a rare circumstance that’s oft not repeated. Most companies don’t find themselves in the position of tending to their “war chest” of cash. Most use debt as a part of their fiscal policy. That’s what CFOs are paid to do: manage cash. I won’t pretend to be an expert – I know my limitations, and that’s why I hire outstanding money managers as CFOs. I like those with conservative fiscal policies personally.

    To your point of the three methods of acquiring the funds to open a restaurant, I might suggest that a combination of all three of your suggested methods is common: savings, investors, debt. Let’s face it, no investor or bank would invest or lend without the owner having cash in the deal. Investors want you to have “skin in the game” while lenders will require equity (skin in the game) and collateral (typically your house, your building, land, equipment, inventory, receivables or all of the above – aka, a personal guarantee.)

    I’m in complete agreement with your general line of thinking. In many cases debt isn’t necessary or advised. In others, it’s a great tool. Here are some examples where debt can be an effective tool:

    1. Acquiring Real Assets – building a commercial building as an example, buying machinery which has a long useful life, purchasing vehicles. In many cases where the useful life is very short (<2 years) we'll lease equipment. In my first company – a regional ISP – we leased all of our computer and networking equipment. Why? In 1995, the useful life of a rack of modems was about 6 months – we went from 19.2 to 28.8 to 56K to digital modems in two years. At the end of 6 months an $8000 rack of modems had zero salvage value. We did FMV leases and turned in the gear at the end. I paid a few thousand dollars while a company down the street paid $8K and had $6K worth of depreciation left on the books they had to write off in 6 months. The modems cost us a fraction of their purchase price and we upgraded to the latest when the lease terminated. Leases are a form of debt. I know more than a few companies that had lots of fancy gear collecting dust because they bought instead of leased – most of them had no cash to upgrade because they sunk cash into boat anchors – they eventually lost customers as a result. Would I lease a forklift? Probably not. Forklifts last for 25 years. Would I lease restaurant equipment? Probably not – unless it was some new wizbang thing that's likely to be outdated quickly and needs to be replaced by the next new wizbang.

    2. Financing Cash Flow Cycles – a revolving line of credit is probably the most common use of debt inside nearly every business. A revolving line of credit is a very useful tool to draw and pay down in order to fund cycles in cash flow. Let's face it – sometimes customers (even banks – if you can imagine) don't pay their bills on time. I owned a large construction company where the invoices were $500K-$1M and were frequently paid just after a payroll was due or a just after a lean waiver exchange was made with a sub-contractor. We tend to like to make payroll and pay our subs, so we use our line of credit on occasion when necessary, then immediately pay it down upon receipt of customer invoices.

    Again, just a few examples. It all depends on a lot of factors. I personally don't prefer to use a lot of debt. But it can be a useful tool. Our customers (in my family business) are all financial institutions – banks and credit unions. We typically use a revolving line of credit as described and we occasionally take a loan to purchase vehicles as we have a large fleet – we can borrow at good rates and preserve cash for things like purchasing inventory (and paying employees). In our case, based on the type of use, it made sense to build rather than continue to lease. If we had to pay cash for our building, we would have never been able to grow. No one wants 100% of their cash tied up in a non-working asset like their building. I'd agree that a mom & pop restaurant might get away with saving up a little cash and leasing a strip mall space to get started. Absolutely. In-fact there are a lot of franchise restaurants you can start with little cash – they're not usually stand alone buildings. But, Applebee's owners doesn't pay cash for their buildings. An Applebee's costs several million to build. A Sonic costs the same. A Hollister costs $700-800K to build (Hollister's aren't franchises – just giving some perspective as to the real cost to open the doors). That's just the cost to open the doors. That doesn't include liability insurance, workman's comp, payroll, utilities, inventory or anything else. That's why you'll find that many higher-end franchises like that require a certain amount of net liquid assets and net worth from the owners before approval. In some cases the franchisor will finance construction though.

    I guess my point is only this: the right answer completely depends on the scenario. Finance 101 – buy or lease. Time value of money. Evaluate every purchase situation as a separate situation. Evaluate every business opportunity as a separate opportunity – how much cash does it take to be successful? What is your measure of successful? What are your goals, etc. All these questions play into how you start and grow your business. I hope at least some of this was helpful ๐Ÿ™‚

    Best,

    Scott Oppliger
    SocialVolt, Inc. | CEO
    Mobile | 913.485.8270
    Email | [email protected]
    http://www.socialvolt.com
    @socialvolt | @oppliger

    • Scott,

      Man, what a great comment! Thank you for taking the time to share your thoughts.

      I’ll admit my restaurant example was a bit light. ๐Ÿ™‚ You’re right that most businesses/restaurants use a combination of the three methods for the very reasons you mentioned.

      I’ll number my response to match your points:

      1. As it pertains to using debt to acquire assets. You’re right that a lease is debt. You’re also right that it can be better than buying (in the case of rapidly decreasing asset values). I’d have to know more about the specific situation, but I have to wonder if your only options were to either lease or buy. I think we sometimes create false decisions for ourselves by looking through narrow lenses. I’m not suggesting that you did. Just that, without more information, I can’t provide a response to this point.

      When it comes to building a commercial building, I understand the viewpoint of not tying up all your cash. However, I think with proper cash flow management, you can expand (including building your own facilities) without debt. Without a doubt, it’s more difficult and could take more time.

      Plenty of businesses do it. We just don’t hear about them very often.

      2. Financing cash flow cycles is one that I know a lot of companies do (payroll especially). Again, it’s a very common practice, but I think that it’s one that’s not “necessary.” Plenty of companies operate exceptionally without doing this. And, I would argue, this is an area where I would get concerned about a company that finances payroll because the cash isn’t there at the moment (the typical use). It would lead me to question why they aren’t building a cash reserves fund for payroll so they can self-finance their own payroll/accounts receivable concerns.

      More often than not, I would argue that this type of debt use is actually a derivative of poor cash flow management – not a tool of good cash flow management.

      As for stores/restaurants like Applebee’s, Hollister, etc., I would go back to what I said about restaurants. If you want to own a franchise like that, is debt the only way to do it? Or is it just the most expedient way to do it? My point is that it’s the later. Someone is trying to go from “I don’t own a store” to “I own a store” very quickly.

      We know from study after study that debt is considered the #1 reason a business folds. If that’s the case, wouldn’t we all be better to find creative ways of growing companies without debt?

      Many thanks, again, for the great comment! I appreciate it. Feel free to respond as you have time. I know you’re busy.

      Cheers,
      Travis

  • Travis,

    I have to tell you that I completely appreciate your honesty and your belief that a loan is impatience in action. I am not going to tell you that I have no debt as I am making payments on a home and almost every car I’ve ever owned came with a loan. But I endeavor to pay off these loans long before they are amortized to be completed. My truck was paid off in 16 months.

    I am currently in the process of bootstrapping my second business and the first I bootstrapped as well. After 4 years I am selling off my clients to pursue other ventures and its been a great learning experience. Was I as successful as I had hoped? No. When I started with $1,600.00 I never really expected to make it for over 4 years with no debt. I am selling in the black and I feel that I have a lot of knowledge to move forward with and I still believe that debt is unnecessary for a business. Creativity, hard work, and patience are a lot more important.

    What I also believe is that Kiva performs a necessary function in the war against poverty. The people receiving these loans are desperate and to start a business without debt they would have to take food away from their family in order to save the money to get started. So is taking out a loan bad? No. Sometimes it is the best possible thing to do because waiting would be worse. But still, debt = impatience. And I have to say that the reason can justify the means.

    Tim

    • Tim – Love your story! Been there, done that, my friend! Had a house we couldn’t afford, two car payments (man, I miss my Yukon Denali), a motorcycle (miss that too), and a bunch of credit cards. We were stupid. I love hearing that you’re working to pay them off quickly. That is just awesome!Bootstrapping a large business can be done. Plenty of people have done it and it’s great to hear stories of others who are working to do it. I love what you said: “Creativity, hard work, and patience are a lot more important.”As for Kiva, I get it. I understand the argument and it’s truly an “ends-justify-the-means” type of thing. That’s why I debated including that in my post. But I thought it was necessary. I also don’t think ill of anyone who is involved with that organization – nor would I say they should stop or that people shouldn’t support it. I just have to question if there is a better way.For example, could donations + education be used in place of loans? As we’ve seen, we’re not talking large dollars or startup capital from a USD perspective. Could we just GIVE them the money along with courses on how to use it to create and run a business on a budget?I’m certainly not suggesting that we do nothing (not that you implied that, by the way). What you said is right, these are people without margin who don’t have discretionary room in their budget to use to save. So we need to do something. The core mission of Kiva – helping entrepreneurs is so near and dear to my heart, words can’t explain it.Great stuff. Thanks again for sharing!-Travis

      • Anonymous

        Thank you. I should have clarified my debt situation a bit more… Though I used to have a ton and my credit score was in the high 400’s (horrible) but since getting married I have paid off all but the house. I carry a zero balance on my credit card and thats the way I like it.

        I will continue to use loans for the big ticket items (like my dream car, the Cadillac CTS-V) but I always try to pay these things off before the deadline. My wife and I pay a bit extra on our mortgage every month in an effort to have it paid off ASAP. Debt sucks and I completely get the quote from Proverbs. Love the fact that you quoted the Bible. Christian?

        It was a great post and I believe that it will help people to count the cost of debt. Might you want to include a quick amortization of a loan to show how much people will spend in interest alone on a typical loan?

        Tim

      • Jeff

        I’m both a Kiva supporter and a Dave Ramsey fan. Thank you for providing me the argument in favor of Kiva. (You just helped me make my decision about whether Kiva is a good deal.)

        You say, “Could we just GIVE them the money along with courses on how to use it to create and run a business on a budget?” Well, yes, we could, but two other dynamics play in more powerfully through lending. If you lend someone the money, they retain their self-respect and sense of dignity. Secondly, they do have an increased sense of obligation to use that money more wisely — the borrower slave to the lender bit. The intent with Kiva is that tt’s a temporary indignity, unlike how we tend to use credit as a permanent condition.

        In fact, to your point, many Kiva programs use the interest on those loans for only one reason: to fund the courses on how to use it to create and run a business on a budget. The payback time is accountability of a sort that rarely happens with a simple donation. It also requires a certain expectation of success, not just to get back the money, but the interest as well, that means even more decent long-term margins once the debt is repaid and the business is self-funding.

        That level of success that comes from thinking through the end from the beginning, which is built into the Kiva program, has the opposite effect as most debt in the US. (Ironically, I know) it helps break the cycle of dependency rather than perpetuate one.

  • Anonymous

    It depends on who you’re going to go into debt to. To credit cards: bad idea. To pay for a great education: good idea. To take investment dollars in a venture before you’ve made money with that venture: bad idea. To take investment dollars from someone who will open up untold amount of doors for you and your business and not ask for too much equity: good idea.

    The argument about a home loan is certainly arguable from both sides. I bought a house in 2006 in Vanderbilt area of Nashville. Sold it today for less than what we paid. At the time, seemed like a solid investment. Today, not so much. But, with that said, I will do it again in 3-5 years, this time on the right side of the curve.

    On Bootstrapping, I am about to launch a venture called EarlyCompany that is entirely based on the idea of connecting resources that can share equity in a startup and perform necessary tasks to maintain as close to a zero balance bottom line as possible. The goal being to get ideas transformed into profitable businesses, or get them into great incubator programs like TechStars or YCombinator.

    • Thanks for commenting, Chris!

      I think a solid and valuable education can be done without student loans by working your way through college – a lot of people have done it – including myself. I first went to a junior college to get all the basics out of the way. Then I went to USC (paid for by my parents for 1 semester) before dropping out (which didn’t make them happy). Later, I went back and paid for a private college (The Master’s College in CA) degree without debt. I worked a more-than-full-time job as the CTO of a company during the day and did classes at night.

      Honestly, it was one of the dumbest financial decisions I made. Not because I paid cash, but because I even did it. It’s never once been necessary for me. I’ve learned more by working and by continuing to read voraciously (had to drop in a big word so people know I’m educated ๐Ÿ™‚ ). That’s not to say that people *shouldn’t* go to college. Just that going into debt for it is both optional and unnecessary.

      I’m not arguing against taking outside investment. That’s just a personal choice. I think it can be a great way to build your company without debt. I don’t think it’s for everyone and every business, but I do think it’s an option that a lot of companies will (and should) consider.

      I agree that the home loan argument can be made from both sides. I’ve been on both sides. Bought and sold two homes between 2001 and 2006 and got out right before the decline started. I love home ownership. I just realized that my risk meter is a bit busted. I’m a risk-taker by nature and a great way to avoid getting into problems with real estate is to avoid buying it without debt.

      Again, my only argument is that debt is not necessary. Debt just allows us to speed up the process of getting what we want – not necessarily what we need.

      On EarlyCompany: I LOVE this idea. It’s really a brilliant strategy and a much needed resource for early-stage startups looking to go on to raise capital. Knowing what I know of you, I have no doubt you’re going to make this happen. When will you be launching? Or would you have to kill me if you told me? ๐Ÿ˜‰

      Cheers,
      Travis

  • First time here Travis, saw your tweet and read the post, excellent by the way. I have an additional perspective on Proverbs 22:7 in that it’s simply stating the fact that the borrower is servant to the lender. Not 100% sure it’s saying “Thou shalt not be in debt!” I’m also reminded of several biblical stories of the lending of money. If lending is okay, wouldn’t borrowing be also?

    • Thank you for visiting and leaving a comment, Steve! I do know which verses you’re referring to and I think it’s a great and valid question. On this one, would you be okay having this conversation via email?

      Given that my intent with my blog is primarily to discuss business issues (which are undoubtedly shaped by my beliefs), I’d prefer to avoid this becoming a public analysis of Biblical interpretations.

      Would that be cool with you?

      Thanks,
      Travis

    • I’ve always thought it interesting to view Proverbs 22:7 next to Galatians 5:1 โ€” “Christ has freed us so that we may enjoy the benefits of freedom. Therefore, be firm in this freedom, and donโ€™t become slaves again.”

  • “Debt is a tool of the impatient.” You’re absolutely right on that one and I’m not the slightest bit angry ;).

    Bootstrapping your business is the model to which we should aspire. It is also a very western luxury. If I’m working in a cube, hating my life and dreaming about opening my own business, then I have the luxury of putting a savings plan into motion, developing a business plan, and working towards my launch. I may hate my life, but I’ve still got the means to go on living. To take out a business loan and dive off the deep end would be foolishly impatient.

    Now, transport me to Uganda. It takes $3 a day to feed my family. I work 12 hours a day doing hard manual labor. I spend another 6 hours walking to and from the nearest watering hole to fetch water for my family. I’ve got this great idea to build a small community business that will drastically improve my family’s situation and my community. I make $3 a day. Saving money is not an option. To me, bootstrapping a business is a fancy idea cooked up by some rich white guy with a little too much money.

    I don’t know if loaning money is the best answer, but I do believe its a viable option. I’ve read about some very effective methods of doing this, without creating a culture of indentured servitude. Ask me about them some time.

    I’ve got a great little success story I picked out of The Hole in Our Gospel for ya:

    Setting: Zambia
    Rodrick, Beatrice, and their children were living in extreme poverty. The had no income, food, health care, and no opportunities. They were hardworking and clever, however. Their one possession was a hair dryer, so they started a haircutting business to earn a few dollars. World Vision staff were impressed by this and decided to give them a small loan for an idea they had. The idea; tye-dying bolts of cloth in hopes of selling them to women who made their families’ clothing.

    4 years later, their business had succeeded. They immediately paid back their loan and then opened a small storefront to sell food,diapers,and a few other items. That 1 store turned into 2, so they hired their first employee. They used their resources to get hooked up to the electric grid. Rodrick then started a welding business. Then, he started a car battery charging business. Them he built a Cel-Tel station for buying phones and minutes.

    Next, he built a building out of scrap lumber and tin, bought a TV/DVD player & satellite dish, and opened his community’s very first movie theater. Not only did he show movies, but he showed all of the professional soccer matches. At the time of the story’s writing, he was building a community pool hall.

    Rodrick was able to turn a profit, invest in his community, and keep young men out of trouble. It all started with a micro-loan. I’m not saying its the very best thing we can do to help these people. I’d sooner just give him the money, but there is an important aspect of planning and accountability that goes in to building a business, pitching it, and having to secure a loan.

    • Kenny,

      Glad to hear you’re not mad at me!

      Perhaps the option of bootstrapping is a luxury of wealthier societies. I’m not going to argue that one way or the other because I’ve never lived in abject poverty.

      Assuming you’re correct, I still think I’d call into question the methodology of loaning money. As I pointed out in my comment to Tim Biden above, is there room for a gift + education alternative?

      (Full disclosure on the next comment: Lisa and I financially support World Vision.)

      The story you quote about Rodrick and World Vision is a great story. But it’s also anecdotal. I could likely find you a story of someone in a third world country who didn’t turn out like Rodrick even though they were loaned money. I also have to wonder if the man was motivated by the loan or by his desire to provide for his family. Was it the loan that caused this success? Not sure I’d make that argument. Certainly he needed capital and funds.

      Anytime we look at programs like this, it’s important for all of us (myself included) to focus on results – not just intentions. Good intentions are notorious for creating programs that don’t really work. The US welfare program is a great example of this. The *intent* of the program – to help people who are in poverty – is a good one. However, the methodology is clearly not working. Yet we continue to throw good money after bad because we *feel better* as a nation. We praise ourselves for our intent while turning a blind eye to the problems we’re causing for people on the system.

      I may have just turned this into a political discourse. ๐Ÿ™‚

      Thoughts?

      -Travis

      • Funny story, I had dinner with a few guys from the Ramsey Show last night and they were in favor of the concept of micro-finance. Of course they couldn’t speak for Dave, however. ;)Like I said, I don’t know if the methodology of loaning is the best choice, but it still exists as a viable option as opposed to doing nothing. I agree that there has to be a better way of getting capital into the hands of indigenous people who have the true desire and capability to improve their communities. After taking a little time to let the issue marinate, I realize the thing that I do appreciate the most is the due diligence required in getting a loan and the accountability of having to repay it. If we could distill the advantages of that process, that’d be best for everyone. I hate the idea of throwing money at people, but love the concept of providing money + education. What if the process were approached in a similar manner as writing a proposal to receive grant money? That would provide the need for due diligence in designing a viable business plan. Education, on-going mentoring, and performance coaching/review could satisfy the accountability elements of that scenario as well.I’m just throwing ideas out there. I’ll let the wiser, more experience gentlemen in the room tell me how and why I’m wrong. ;)(Notice how I completely ducked out on the political discourse.)Kenny

        • Appreciate the avoidance on the political discourse. ๐Ÿ™‚

          Obviously, there are a lot of people who would disagree with me about Kiva – Dave Ramsey may even be one of them. I’m certainly willing to be persuaded. I’ve changed my viewpoint over the years and if I ever get to the point where I’m not willing to change, feel free to slap me hard. ๐Ÿ™‚

          As for your idea, I like it! Now we’re thinking of alternatives – which is ultimately what my point was. There are always alternatives if we choose to look for them.

          The idea of a grant-style process along with money, education, mentoring, coaching, etc. could make for a VERY powerful program. I also think it would provide the framework for long-term success. It adds in all of elements that make people successful anywhere. And it does it without debt.

          Thanks for the dialogue. Also, if you find the wiser, more experienced gentlemen, warn me so I don’t offend them!

          -Travis

  • Travis,

    I agree 100% Debt is unnecessary – even for school.

    I played music at a new club in Los Angeles last year. Slow night – they had just opened. After playing, I sat at the bar, indulging myself with my mixed drink of choice, an Arnold Palmer. The owner and his friend were talking.. about.. selling sandwiches at a large construction project. They would bring a cart over, $5 sandwiches with chips. 4 sandwich choices – simple.

    I got the idea he sold a lot of sandwiches so I asked him. He said, “Sandwiches bought this club.”

    He explained, he started selling 3 kinds of sandwiches at 2 large construction projects – selling hundreds of them. He used that to by a failed sandwich shop 2 years later. For 4 years they offered 5 different sandwiches and he sent an employee out to another construction site at lunch each day.

    5 years later he bought the night club. He paid more than 50% down on a good building and a mainstay of the club – which is open as a club at night – is sandwiches at lunch.

    Hmmm….

    • Thanks for sharing that story, Matt!

      I love what he said, “Sandwiches bought this club.” It just shows that a bit of creativity and patience goes a long way.

      Cheers,
      Travis

  • Interesting article. You might like this blog post by Joel Spolsky:
    http://www.joelonsoftware.com/articles/fog0000000056.html

    He basically compares two business models: the “Ben & Jerry’s” approach (grow slowly) and the “Amazon” approach (spend loads of money to grow as quickly as possible).

    • Thanks for sharing that article, John! I’ll check it out.

      -Travis

  • You got an awesome conversation going here Travis! (But, that’s to be expected) Here’s my bit.The meta:It’s interesting what conversations like these reveal about people’s priorities. You also hint at a curious association between those values and where they’re willing to take risks (i.e. potential sacrifice). It reminds me of a similar observation about the level of our culture’s fear of replacement/failure at work vs. its fear level of replacement/failure in marriage. (I think a good hashtag for this post could be #checkyourselfamerica)One financial planner’s perspective:Before you set flames to me… On a practical side, debt:asset ratio is largely a personal comfort/discipline choice over a clear good or bad choice, as Travis said. Meaning, how much risk are you/your family comfortable with? However, a regular oversight often occurs when someone is not completely honest with themselves about what the consequences are for taking on a debt. A very common example is risking a family’s security to leverage a business (the spouse is aware that the business might fail but rarely translates that to the realistic effect it can have on the families personal finances).It’s ironic that the only situation I can think of that debt could be necessary is when someone has already poorly managed their risk and something unforeseen happens (ER visit could easily be $10K even when insured), leaving them no choice but to take on more debt to cover it. Most times I’m a fan of irony but this is not one of those times. I don’t have to tell you those who’ve seen this happen suffer through a very painful learning process…. Dave Ramsey is one of those people. (hashtag for this thought: #changeispossible #nevergiveup!)

    • Thanks, Lee!

      I love talking finance! [Note: Quick background; feel free to skip it.] When I was a teenager, I decided at 15 that I wanted to be the next Warren Buffet. Only, given my Type A personality, I was going to be better. I started reading finance books, investment books, The Wall Street Journal, etc. All they way through high school and into college, this was my plan. I ended up at USC to study finance, dropped out, got married, went to work in technology for the financial industry, etc. I put this here only so that people know that I’m not unqualified in this area.

      Okay…done with the background.

      For generations, debt was viewed as a good/bad thing not a comfort/discipline thing. However, many years and trillions of dollars later, the financial services industry has convinced people that it’s the later. If people really were disciplined with it, the industry would implode because banking is built on debt. That’s why credit cards are issued to people. They don’t make money when you pay it off each month. But most people don’t.

      Someone else also mentioned above in a comment that it comes down to a comfort level with risk and that it sounds like I’m risk averse. It’s actually just the opposite. I’m a risk taker. Hence my aversion to debt.

      I have an extremely high risk tolerance which is why I was willing (originally) to rack up so much debt. My stance on debt now has nothing to do with being risk averse but to protect my family from levels of risk that I’m willing to take.

      There are a lot of “risk averse” people who never saw a home loan as risky until just a couple of years ago when they ended up foreclosed on. A home loan is a risk. Buying a home in cash is a risk (some properties do go down in value). But one will put you in a lot worse situation than the other.

      As far as debt being necessary in the situation you mentioned (ER visit), structured payments and settlements with the hospital always possible without taking on any 3rd party debt. We had to do that for Lisa’s appendectomy surgery. We had a bill of roughly $5,000 (our deductible) that we were responsible for. We just called the doctor and worked out a payment plan. We also worked out a reduced rate.

      Thoughts?

      -Travis

      • Payment plans to a hospital, or whomever, are still debt. So I stand by the fact that the only situation I can think of where debt become necessary (i.e. one is forced into it) is when someone has already poorly managed their debt. This is why I advise against debt to most of my clients. It can be a very slick slope that even the most disciplined can become subject too. Then it can become viciously cyclical.

        So do you still wish to be the next Warren Buffet, Travis?

  • Denise

    Micro loans do wonderful work, but they aren’t perfect…sometimes life gets in the way, and then the borrower struggles to repay the loan. Is there another way to get the equivalent of a micro loan into their hands?

    You could give them the money or supplies, but by human nature, we don’t generally fully appreciate what we have been given and feel less pressure to do whatever it takes to succeed. Some groups within these communities do not want people “given” something because it makes them less self-sufficient and continues the “beggar” mentality that they want them to leave behind.

    I have seen an organization that does give the needed supplies for livestock business. http://www.heifer.org/gift trains families and then gives them livestock. Generally, the family is required to train another family and give them 1 offspring as a way of “paying it forward”. This is will probably never be a self-sustaining operation though, people will always be needed to donate money to buy more livestock for other families. Could this be translated into other businesses other than livestock?

    Is there some work that could be done…perhaps on donated projects to improve the community…which could earn the prospective business owners the money and business training to make a good go of the business?

    I don’t know. One advantage to micro loans is that with time they can be self-sustaining. Initial donations fund the micro loan. As those loans are paid back, there is money to loan out to other prospective businesses.

    • Denise –

      You bring up some great points about program sustainability. Take a look at the dialogue above between Kenny Silva and I about alternatives involving a similar application process, education, mentoring, and a few other elements that could provide the framework without the debt.

      I agree with you about not wanting to promote the “beggar” mentality. It’s why I love the mission of Kiva. I have a heart and a passion for entrepreneurs and I think they are a big key to ending poverty in a nation. I’m just trying to figure out alternatives that don’t involve the burden of debt to an already burdened person.

      Also, I’m curious about results – something that I can’t find on the site. But it’s critical that we evaluate the results of a program, not just the intentions (which are undoubtedly great in the case of Kiva).

      Thoughts?

      -Travis

  • Samcconnell01

    What are your thoughts on using your 401K to invest/purchase a business that is already established using the 401 along with a small business loan. The 401 would still be intact but it would be used as the investment asset along with the bank loan. My husband is looking to do this ASAP so I would really appreciate any input on this. Thank you!

    • STOP! Don’t do it!

      1. Never tap your nest egg for an investment in a single business. You’ve heard the saying, “Never put all your eggs in one basket.” This would be foolish and risky.

      2. I can’t tell if the 401k would be put up as collateral for the business or if you would pull some out from your question. So I’ll respond to either scenario: DON’T DO IT! When you pull money out of your 401k, you’re borrowing against it at interest. So, what your husband would be doing is taking out 2 loans to invest in a business. If he’s just using it as collateral for the loan, it’s still a bad decision. DO NOT RISK YOUR PERSONAL ASSETS ON A BUSINESS! PLEASE!

      It’s great that he wants to invest in a business. I’m all for it, just don’t use borrowed money or your retirement nest egg to do it. Save a separate fund to use for business ventures. He needs to protect his family’s future first, then invest in businesses second.

      Let me know if you have any further questions.

      -Travis

  • Travis,

    Thank you for calling it like it is; that it’s a tool for the impatient. It took me almost 10 years to learn how to be patient. The most convincing arguments that changed my mind were the examples of Dave and others. Once I saw how they lived a debt free life and still enjoyed life, I realized I could as well. The last straw was fully understanding how compounding interest can make or break your life – literally. Once you see how much you have to pay for your impatience, it motivates you to “bootstrap,” or be patient. I enjoyed your perspective and agree with you on Kiva.

    • Jesse,

      Thank you so much for the note. It is possible, as you know. It just takes a willingness to make some sacrifices.

      You’re absolutely right about compounding interest – it’s a powerful tool that can work for you or against you. I love hearing stories like yours and I thank you for sharing!

      As for Kiva, there were some great thoughts on alternatives in my dialogue with Kenny Silva above that you may find interesting. There are always alternatives if we’re willing to look for them.

      Cheers!
      Travis

  • Anonymous

    While I truley admire your courage and leadership desires exhibited through consistent thought leadership in various fields, I can’t begin to tell you how misguided and neophyte your perception of debt and finance appears.

    Money is a tool just like any other that can be used to obtain certain outcomes. (In this case the outcome is a successful business.) It therefore seems to me that you place all emphasis on the tool as opposed to the person using or influencing the outcomes/ performance of the tool. Regardless of where the tool comes from it is the proper planning and execution of a venture that will ultimately determine its success, not the financing itself.

    What you do seem to be correct about is the negative risks involved in using debt finance and personal liability, however the first rule of finance is where there is high risks there is a possibility of highest reward. The use of debt can exponentially multiply the time to earnings in a venture; this time for which you seemed to disregard as worthless, can actually be the determining factor for which you can succeed or fail in a venture for many glaring reasons I am sure you are aware of.

    In conclusion more time on your part should be spent emphasizing the critical role of research and planning so that one can be prepared to execute a venture as that is truly the ONLY way of mitigating risk in the real world. Debt is not always mandatory however it is a fantastic tool that can be used for extreme benefit once used properly by the well trained/ experienced individual.

    Actually more personally financed businesses fail than debt financed ones do. Do you know why? There is a process through which you must undergo to obtain debt. This processes assures that your plans are concrete enough to have a greater chance of success and survival. Personal financing does not require this critical amount of preparedness.

    Planning is the only step that is mandatory to ensure success. Begin to place the focus on the influencer not the tool.

    • Thanks for adding to the conversation!

      I’m hardly a neophyte since I have experience on this topic. Misguided? Well you’re certainly entitled to your opinions.

      Yes, money is a tool. But don’t confuse money and debt. Money is required for a successful business – debt is not.

      As I said in the post, there are a plenty of successful companies that have been started and run without the use of debt. We both agree that there are negative risks involved in using debt financing and personal liability.

      I disagree that “where there is high risks there is a possibility of highest reward.” This is a maxim, not necessarily a rule. There is just as much opportunity for reward by using investor financing and it doesn’t require nearly the level of risk. We throw colloquialisms around without actually thinking about whether they’re actually valid.

      Both debt financing and investor financing require the creation of a solid business plan. Only one method will force you to risk more money that you can actually afford to lose.

      As for more personally financed businesses failing than debt-financed businesses, do you have a source to back that up? Supposing it’s true, was it the debt that caused them to succeed or was it the presence of the plan?

      My vote is with the plan and it would sound like yours is as well.

      I’ve yet to hear a compelling argument on why debt a fantastic tool. Instead, you’ve just made a really good case for having a plan – something I’m in full agreement with.

  • Anonymous

    I never said that debt is responsible for the success of a venture, I repeatedly emphasized the critical element of proper planning which is the only absolute to ensuring a successful venture. The compulsory factor is not where the money or resources come from as they are just tools to be used to achieved outcomes. Now whether it be debt or investor based resources, that all depends on the scenario, the liquidity of the markets (access to capital) and the state of the economy.

    Now the real question to me is, are you then encouraging your readers to remove the accountability aspect out of financing? Your basically saying that there is a chance that a venture will not succeed so don’t use personally financed money? Your saying that if you have a comprehensive planning process, a cohesive talented team and a passion filled opportunity don’t pursue it with personally liable funds? I hope you advise your readers to leave this part out of their investor pitch as most investors will not be encouraged without as the revered Warren Buffet puts it “skin in the game.”

    You keep bringing to mention countless successful businesses that were exclusive of debt financing, which has very little value unless this point eradicates the countless businesses that achieved tremendous success through this same debt finance process.

    Your approach to financing is to encourage conservatism, which is fine as people have families and there are unforeseen hazards involved. However in the absence of investor funds or personal debt free cash what should the world do? Your suggestion is to work hard and save money, which if the intent and resources were going to be successful in the first instance is a waste of time. You are telling people to be fearful of failure and never believe in themselves enough to be personally liable even if they have placed most emphasis on creating a comprehensive plan?

    My only advice to you is to not be so dogmatic in your approach to a topic. There is no secret formula, and every scenario is different and requires a unique approach, I truly don’t think that even you fully believe that there is never a need for debt in a business. You seem way to smart in other posts to act so inexperienced and place an absolute on the use of debt when you know fully well it can be used in a productive way and in instances it may be your “best” option. (while not your only option as you advise working and saving for a lifetime)

    Again while nothing is truly absolute please don’t act as if you cannot think of scenarios whereby debt/ leveraged money (even if you borrow against investor funds) increases earnings potential in a deal. I know you are better than this so while the proverbial high risk high reward may again not be absolute, it does have tremendous value in society’s architecture. Low risk is easy, the reward for easy will be reflective of such. I do not need to explain this to you in detail.

    My final point deals with the psychology aspect of personal liability which I am sure if you take the time to think about it you will realize that a man is less likely to be wasteful if he knew his but was on the line or family depended upon it. This is just how we are as humans and not only will a man be more risk averse with liable funds, he will be more motivated with the knowledge of repercussions attached to failure.

    If our financial system was built upon the premise of increased personal liability we would have drastically reduced the greed and carelessness commonly attributed to investment banking. Harvard University agrees with me so I would seriously re-position my arguments.

    http://blogs.law.harvard.edu/corpgov/2010/01/28/why-investment-bankers-should-have-some-personal-liability/

    I think you will come to notice that unfortunately it is your perception of the use, requirements and productivity of debt that is the solitary “maxim” which exists in this argument. Education, preparedness, structured planning through market research are the only absolutes to ensuring success and reducing risk of failure. The physical money can come from virtually anywhere.

  • The actual surgery isn’t necessary, you can live your life well into old age with a torn up knee, but you’ll have limited ability for the rest of your life. …

  • Travis,

    Perhaps there is no more relevant topic than this. Thanks for weighing in!

    Our Very Cool and Wise Creatorโ„ข (GOD) in that very cool play book (the bible) he designed for us weighs in on the notion of debt and it’s destructive hooks which are to numerous to count.

    Instruction:
    Romans 13:8 Keep out of debt and owe no man anything, except to love one another; for he who loves his neighbor [who practices loving others] has fulfilled the Law

    Why?
    Romans 13:10 Love does no wrong to one’s neighbor [it never hurts anybody]. Therefore love meets all the requirements and is the fulfilling of the Law.

    Debt is impossible to control and therefore predict because of the way it affects its host (the borrower)

    **Far to often the lust (impatience) for success or for a better life compels us to invite debt into our home/business a guest, and after gaining entrance quickly becomes a host and then a very dangerous master.

    It in very subtle and seemingly harmless ways convinces us that it is the source for what we seek and not our creator. After it persuades us to cozy up to it, infects us in very unpredictable ways. The emphasis is on unpredictable. No one can predict, no matter how smart and savvy you think you may be, the effect debt will have on you. The danger is that the effect is never immediate, never “oh my God I had no idea you were going to effect me like this”. It’s not until the damage is done that the effects become apparent.

    There is perhaps nothing more divisive, more dangerous, more to be avoided than debt. It twists the minds of men and causes them to think in ways that are completely unaligned with their Very Cool and Wise Creatorโ„ข and now as much as ever we need to be aligned with God.

    BTW – Going into debt ALWAYS harms or hurts others, which keeps us from honoring our creator. Again it may not appear at first like any harms being or been done, but if we tracked the debt from beginning to end I can guarantee you will always find harm.

    ** a rewrite from Kahlil Gibrans wonderful book the Prophet in which he writes: The lust for comfort, that stealthy things that slips into a home a guest, then becomes a host and finally a master.

    • Thanks for weighing in, Les! Appreciate you sharing your insights with everyone. You’re right that debt can be very harming to people involved in the transaction.