Businesses Built on Debt – Don’t Take the Risk
I went out for a drink with a former colleague just before Christmas. She shared with me a tale of woe about how the company she still works for, that I did some work with a while back, was going nowhere fast. Essentially, she wanted to pick my brain about starting her own business has seen me do it, a conversation I will always welcome!
Now, let’s play fair here. I finished my contract with said company and left on very good terms, so I shall neither name them nor divulge the industry. However, whilst there I was party to a few conversations among certain senior figures pertaining to their increasing debt to equity ratio; rarely a good sign, in my opinion, although not my place to judge.
Now whilst I did not share that information, she did share her idea, vision and I must say I was intrigued. She mentioned that her credit score was good and, despite not being a homeowner, felt comfortable about raising finance to commence as she had an in-principle agreement with her first client.
“Whoah, horsey”! Said I. What happens if the goalposts are moved and/or this agreement does not come to fruition for whatever reason? What’s the plan-B? What level of stability are you aiming for and in what timescale? Apart from asking me what scalability referred to, she then also said that if she is a limited company then it’s OK as if the worse came to the worst, the debts would stay with the company and not affect her! “Whoah, horsey”! Said I.
I was stunned, suggested having a read about directors’ loan accounts and, more importantly, insisted on seeking out some formal advice from a trained professional! Particularly if her funding source demands a personal guarantee.
What I did impair though was a little common sense, based on my own experience. I asked her how long it would take for the first invoice to clear and how much she would need to get by every month. In my own example, I saved £4k. This provided me with £1k per month which allowed me to eat, just about pay my overheads and get around.
You also must make sacrifices. You can put a pin in that week in Ibiza and maybe that new car can go on hold for a little while longer. I had to miss a stag do in Vegas and a cup semi-final, but it was worth it.
Don’t get me wrong by the way, I think she’ll absolutely crush it. With her ideas, drive and motivation; I do not see why she would not succeed in a short space of time. My point here is to become aware and prepare for what could happen; to cover your back, basically. Failure to prepare is preparing to fail after all.
Do not build your business on debt. It’s like a game of Risk - rolling with 2 dice when your opponent rolls 3.