Borrowing Money to Start a Business
Written by Rosalind Resnick for Gaebler Ventures
Some entrepreneurs avoid debt at all costs. Business expert Rosalind Resnick of Axxess Business Consulting says that may be a mistake. If used judiciously, debt can be a powerful force in getting your new company off to a running start.
For many people, especially first-time business owners, debt can be a frightening word.
Most of us learn at an early age that we shouldn't borrow more than we can repay.
And, if we don't learn that as kids, we're likely to learn it later on when we've maxed out our credit cards and we're stuck paying 19 percent interest.
Pay off your cards at the end of the month, make an extra mortgage payment every year, keep driving that old clunker and you'll retire rich and happy. (Or so the personal finance gurus tell us.)
And that makes sense -- for consumers.
In my opinion, anybody dumb enough to pay 19 percent interest on their credit card balances or lease a fancy sports car for $2,000 a month deserves what they get.
As an entrepreneur and investor, however, I feel just the opposite.
Now that I've come to understand the power of debt financing (it all started with the $100,000 credit line I got from Citibank back when I was running my firm NetCreations), I feel very confident in using leverage to boost the returns on my real estate investments, my business, and other investments - as long as my inner CFO first runs the numbers and decides that they make sense.
My strategy is simple: If I can cover my interest payments with enough cash flow to let me sleep at night, I go ahead and borrow the money.
In my real estate investing, with cash flow covering interest payments, any appreciation that a property generates is icing on the cake.
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Which is why I worried a lot less about borrowing $5.25 million to finance the rental property that I bought in New York's West Village in December 2001 than I did about the $55,000 I borrowed to buy my two-bedroom home in West Palm Beach, Fla., 16 years before that.
The key takeaway is that entrepreneurs who fear debt may want to reconsider their views on using debt to start or grow a business.
While debt financing does have its downside risks, if used wisely, it can be a great asset in generating profits that might otherwise not be possible without debt.
Rosalind Resnick is the founder and CEO of Axxess Business Consulting, a New York consulting firm that advises startups and small businesses.
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