The Whole Truth

Feb 03

2011

Why Entrepreneurs Must Stop Taking Get Out of Debt Advice From Dave Ramsey and Company

by Alexis Neely - Posted in Business, Debt |

I know this is going to be another controversial blog post, but I simply cannot take it any longer and I need you to hear this because if you are an entrepreneur and taking advice on how to handle your debt from Dave Ramsey, Suze Orman, Dani Johnson or any of the other gurus out there, your business is in trouble.

As a business owner, you DO NOT want to get out of debt as quickly as possible like a consumer would.  Debt is a tool for growing your business not a barometer of who you are as a person.

If you have used debt to grow your business, don’t beat yourself up, give yourself a pat on the back.  It’s smart business to use other people’s money to finance your growth.  And in many cases, you will not be able to grow without it.

I remember when I went to apply for my first line of credit for my first business.  I was ready to expand, hire more staff, and upgrade our equipment, but I didn’t have the money in the bank to do it.  So when I met with the banker of my local community bank and he suggested a loan, I was game to try it.  I was blind-sided by the shame and guilt I felt as I completed the loan application.

I applied for the smallest amount I possibly could because I was thinking about debt like a consumer.  The voices in my head said it was bad to carry debt and I needed to pay it off as soon as possible.  That’s great advice for consumers who may be using that debt to finance a lifestyle they cannot really afford, but it is completely wrong for an entrepreneur growing a business.

Following the get out of debt advice of Dave, Dani or Suze could drive your business right into the ground.  For entrepreneurs it’s a whole different game.  You need access to capital.  You must take stock of your available resources and leverage them into one or more revenue streams that will support you, your team and your clients.

Credit is an available resource, but not if you aren’t using it.

You can pay off your debt when you are ready to stop growing your business.  Until then, you want to leverage all your possible resources for investment.  If you do not, you will make choices that hurt your growth.  And for what?  So you can have a 720 credit score?

What does that 720 credit score mean if you are not using it to borrow so you can invest and create more?

And what will it take for you to recognize that your freedom can be so much more vast than simply not carrying any debt?

Once you have paid off your debt, then what?  Will you start investing in your business then? If so, take those resources you are investing in paying off your debt and reallocate at least part of them (if not all) into your business now.

Be grateful that you have access to capital like that and see it for what it is – not a barometer of who you are as a person, but a source of capital for you to grow, both personally and in your business.

Whatever you do, stop thinking about debt like a consumer and start using it like a business owner.


  • Hi Alexis,

    This was really helpful. I have some debt and have been in conflict over
    how high of a priority it should be for me to pay it off. Thinking of it as leverage makes
    sense. And I agree that the freedom I desire is much bigger than being just debt-free.

  • This is really interesting, Alexis, because the “big guns” do this ALL the time in business. They borrow money to make money.

    The key though is the *leveraging* which I hope everyone here understands. That is, you want the returns you make on your debt to be HIGHER than the cost of borrowing.

    Good issue to raise.
    Karri

  • Joshua

    I agree that I don’t want to focus on paying off any debts I have first….I want to focus on what I want to expand..(which in my opinion is taking care of people…..not only with my services but in how I utilize the money system). This me…ans mostly making the minimum payments and focus on profits with integrity to a true and fair money system. I believe by managing money intelligently, offering an amazing service and marketing it authentically with passion we accomplish A LOT. If I borrow, I encourage the system to steal purchasing power from the fixed income folks. Not gonna do it. Not today….that’s not within my personal integrity anymore.

    You are a heart centered leader with a lot of power…marketing skills, lawyer skills, your connected/networked, and can make things happen.

    With that in mind, I am curious as to what you know about the fiat money system and how the devaluing of the currency impacts your brothers and sister’s fixed social security income or retirement savings income.

    I am wondering if you’d ever jump on board for a movement that lends more integrity our our energy exchange (currency system).

  • Joshua

    Correction: “I am wondering if you’d ever jump on board for a movement that lends more integrity to our energy exchange (currency system).”

  • Joshua

    The freedom you desire Kimberly is here….now….in this moment….or so that’s what I keep telling myself for me. :O)

  • Joshua

    The freedom you desire Kimberly is here….now….in this moment….or so that’s what I keep telling myself for me. :O)

  • Elisha Celeste

    Oooh, Alexis, another hot topic! And probably a confusing one for many people. I know I was one of them not long ago, and am still living with the repercussions of not understanding these distinctions (of personal borrowing vs. business, and the actual nature of debt itself and where it comes from). I am now trying to repair, forgive, and create something new now, for myself and others.

    Joshua, I love what you’re getting at! Our monetary system is BROKEN, and most people today have no idea how it functions or are aware that it is on it’s last hobbling leg. And we wonder why we’re in crisis!

    First let me say that I absolutely AGREE with you Alexis! Debt can be a useful, necessary and even enlightening tool for business-builders and people with initiative. I said this in a conversation the other day with one of our light-being entrepreneur friends and it landed like a shock to her system I think! However…Like Joshua, I know that our current system is not only unsustainable, but it is based on principles of greed and corruption, rather than integrity and altruism. The New Paradigm is asking of us to redeem the money system and transform it into something with these higher qualities.

    So, that being said, I have something that I feel is VERY important to add or bring to the discussion! And that is this: it is my belief that it is the task of our age to not only transform our money stories for us as individuals, but also on a global scale, and from a place of truly understanding what money and economy are (which, in my opinion, are powerful forces for initiation in the modern world!) to create a New system. Part of this money system will absolutely rely on borrowing or loan capital as well as gift capital. But, would it not be radically wonderful for individuals to begin to invest in each other? Instead of going to banks who finance wars and coal mining and so many other destructive forces, we can and will co-create the New Paradigm on a human-to-human scale, taking into consideration values, morals, integrity, AND the serious potential of those seeking financing. In this way, the money becomes a living, flowing, moving Being, rather than something each person chases in a game of self-preservation at all costs!

    Obviously, such a radical departure from our current fiat banking system will take time and guts! But if anything is worth fighting for right now, it is this.

  • Elisha Celeste

    Oooh, Alexis, another hot topic! And probably a confusing one for many people. I know I was one of them not long ago, and am still living with the repercussions of not understanding these distinctions (of personal borrowing vs. business, and the actual nature of debt itself and where it comes from). I am now trying to repair, forgive, and create something new now, for myself and others.

    Joshua, I love what you’re getting at! Our monetary system is BROKEN, and most people today have no idea how it functions or are aware that it is on it’s last hobbling leg. And we wonder why we’re in crisis!

    First let me say that I absolutely AGREE with you Alexis! Debt can be a useful, necessary and even enlightening tool for business-builders and people with initiative. I said this in a conversation the other day with one of our light-being entrepreneur friends and it landed like a shock to her system I think! However…Like Joshua, I know that our current system is not only unsustainable, but it is based on principles of greed and corruption, rather than integrity and altruism. The New Paradigm is asking of us to redeem the money system and transform it into something with these higher qualities.

    So, that being said, I have something that I feel is VERY important to add or bring to the discussion! And that is this: it is my belief that it is the task of our age to not only transform our money stories for us as individuals, but also on a global scale, and from a place of truly understanding what money and economy are (which, in my opinion, are powerful forces for initiation in the modern world!) to create a New system. Part of this money system will absolutely rely on borrowing or loan capital as well as gift capital. But, would it not be radically wonderful for individuals to begin to invest in each other? Instead of going to banks who finance wars and coal mining and so many other destructive forces, we can and will co-create the New Paradigm on a human-to-human scale, taking into consideration values, morals, integrity, AND the serious potential of those seeking financing. In this way, the money becomes a living, flowing, moving Being, rather than something each person chases in a game of self-preservation at all costs!

    Obviously, such a radical departure from our current fiat banking system will take time and guts! But if anything is worth fighting for right now, it is this.

  • Elisha Celeste

    Oh…one more distinction! I am not saying we should rely solely on each other for loan capital, but that this would be done in conjunction with the redemption and transformation of our banking system. We would do well to strive for the creation of banks that truly serve humanity and the earth. Micro-finance is a GREAT example of this!

    Also, this is no airy-fairy utopian idea, but one that could certainly be grounded in solid, practical application and systems such as conscious bookkeeping (Hi Bari!) and conscious accounting. Initiatives would be vetted and held accountable, so that dreams, possibilities and PASSION (!) could be honored, supported and encourage, but also grounded in the practical world.

    I’m getting CHILLS thinking about this! I can’t wait for our blog to go up and book to get out!

  • Great topic Alexis, and one often confusing. I actually have an upcoming blog on the subject of using debt for expenses vs. debt to generate a return, so I am excited to see you shine a light here.

    If you have PERSONAL credit card or similar debt (with 13%-18% interest rates), you will want to get your personal finances in order before thinking about investing in your business (what business wouldn’t love a double-digit return on capital in these times- go with the sure thing)?

    HOWEVER, as you so clearly point out, debt is a very important tool for business growth. As long as you are using it to generate a return that outweighs the costs of the debt.

    A tough thing for many business owners to wrap their heads around, but a critical distinction.

  • Anonymous

    I actually ran my business debt free for years – when it was just little ole me providing services and taking care of biz (being a true solopreneur.) And then I decided to expand my business – which required my investing in a team, in support/coaching for me, travel, systems, etc. Of course alongside that came some debt… and like you shared above Alexis I was actually feeling pretty “guilty” about it for a while!

    I remember having a conversation with my coach about it and talking about how many businesses (most?) use debt as a tool for expansion. So long as we are truly using it to invest in stuff that will help us grow (vs. buying a big screen TV or something) then it is fine. We also talked about the subltely of it being debt vs. credit… a slight distinction really but calling it “credit” really helped shift this in my brain.

    And I did officially get my first business line of credit last year as well – that really helped me shift around this too. Before then I was using personal credit cards and such… which of course gets expensive fast! And then it feels like personal debt too.

    Needless to say, if I hadn’t been willing to use credit in my business there is no way I would be where I am today… and i’m pretty darn happy with. 🙂

  • I understand what you are suggesting, so rather than disagree, I will add my to it. I agree that businesses often need leverage to expand, but it’s more complex than that and can get people into a lot of trouble. I’ve seen it go both ways with my clients. Some grow from debt while others can sink.

    It’s true that large companies use debt, but it’s also true that excessive amounts of leverage is what brought the large investment banks and almost the entire financial system to its knees. Had the government not bailed out the overly leveraged financial system, we would likely be in a depression now because of unsustainable debt levels.

    That said, I agree leverage can be a valuable tool if two things exist.

    First there must be a likelihood of a positive return of investment (ROI) on the debt. The cost of the money (interest) must be less then the additional profit generated from whatever you’re investing in. This may not be immediate, but at some point it has to be, otherwise the debt will have turned out to be a mistake.

    Secondly, there must be sufficient cash flow to maintain the debt payments. It’s true that using debt to make investments that provide future profits may be beneficial, but if you don’t have enough cash to make the payments until that time, you will be bankrupt.

  • Joshua

    Loving the conversation here. And loving this quote too:

    “”We run our company conservatively from a financial point of view because you never know what opportunity is around the corner…We’re very fortunate that if we needed to acquire something we could write a check for it and not have to borrow money”

    Guess who? The almighty APPLE.

    http://www.ibtimes.com/articles/43218/20100813/apple-cash-surplus-dividends-stock-buyback-technology.htm#

  • Joshua

    Over 40 Billion in cash reserves…if there is enough for them..there’s enough for me. :O)

  • It is an incredibly important point. It also depends, I think, on the scale of business you’re talking about. As Tina pointed out, for many folks who are self-employed, debt really isn’t necessary to start. But once the business is rolling and if you make the choice to expand beyond just you and maybe an assistant/bookkeeper/etc, then debt will probably be unavoidable.

    Whence a business plan becomes critical. Thanks for taking it on, Alexis- important stuff.

  • Anonymous

    Sweet Carol. I’m glad you’ll be talking about debt too. We need to help people see that debt as a business owner is much different than debt as a consumer. And I’ll even go so far as to say that in some situations it’s worth it for biz owners to carry high interest credit for temporary periods of rapid growth. Of course, it’s super important that the ROI be pretty darn sure for that to be the case, but when you know you can generate a return on your investment, invest what you’ve got.

  • Anonymous

    Yes, they are very fortunate that’s the case now. But, I can assure you it didn’t start out that way. As start-ups, we cannot run our companies as conservatively as a company that is as mature as Apple.

  • Anonymous

    Bankruptcy is a risk of business. Being an entrepreneur is risky business. And bankruptcy is not the end of the world. I heard that a substantial percentage of highly successful millionaires have gone bankrupt at least once. I’d like to see the shame and guilt around that possibility go away because it’s putting a fear blanket over a lot of people. Lots of people not only recover from BK, but go on to become highly successful. Let’s not let the fear of going bankrupt keep us from taking calculated risks.

  • Anonymous

    Yep, it’s all about expansion. I didn’t need much to start my first business at all, but once I wanted to hire people to help me and set up a nice office, I had to make an investment before I had the income. And this is the case even with a virtual office.

  • Anonymous

    It’s not my brothers and sisters social security income and retirement savings I’m concerned about,it’s our grandparents. It’s too late for them to do anything different and as a society we have to set up FAR better systems for caring for our elders.

    For our brothers and sisters, I’m getting out there and educating them – DO NOT DEPEND ON SOCIAL SECURITY OR YOUR RETIREMENT ACCOUNTS – it’s my belief that they will very likely not be available to support us into our old age.

    Instead, I am teaching them to build themselves revenue streams that will provide value no matter what our currency is so that they can support themselves from their own income until a debilitating illness or death. We have to stop depending on (and perpetuating) a system that is destined for collapse.

  • Thank you for this.

  • I agree Alexis! Here is a short list of many:

    J.C. Penny, John Ringling (Ringling Brothers), Charles Schwab, Sam Walton, Larry King, Kim Basinger, George Washington, Walt Disney, and P.T. Barnum

  • Joshua

    That’s right..it’s too late for the elderly “our grandparents”(who I consider to be my brothers and sisters) to do anything about the current system so perpetuating and encouraging the debt system and encouraging people to take on more debt (even business debt) that banks will print up money to provide impacts them negatively as they are on fixed incomes in most cases and their purchasing power continues to diminish.

    I personally am still in the process of building my own system of sustainability and am by no means a saint when it comes to the elimination of debt on the current system. And I do agree that debt has it’s place…that is with a fair money system…(not what we have here in the States anymore).

    To me, an Evolutionary Entrepreneur or Spiritual Entrepreneur or Conscious Capitalist is conscious of who is impacted by their actions and does whatever they can to eliminate or lessen any negative effects of their actions once they become aware while contributing to the greater good of humanity.

    “We have to stop depending on (and perpetuating) a system that is destined for collapse. ”

    You are perpetuating the “system” by encouraging folks to take on business debt that’s printed by banks out of thin air.

    It sounds like you are aware of the purchasing power that is diminished through the perpetuation of debt for those on fixed incomes or for those who try to save their money and will continue to promote the perpetuation of the debt scheme here in this country by encouraging borrowing from banks who print up new money for business….I am sad to see this.

    I appreciate you encouraging people to become financially independent, I just don’t like your strategy and am still developing my own and need help..so this is why you saw my invitation to step in to another form of leadership but clearly I am barking up the wrong tree for now.

    That said, you’ll still see me around because I am confident there are a few things I can learn from you in other categories that I might be willing to put to use.

    Cheers!

    Joshua

  • Joshua

    See now this is debt I personally can support….that is…if it’s from a private money lender who already has the cash on hand and not a bank who is printing up more cash to fund it.

  • What I find so interesting is all the crap the who topic brings up. I know growing up in my house it was all about “Let’s get that mortgage paid off”, “Let’s only buy what we can afford.” “Let’s make sure the kids don’t have any college loans”. Now as a business owner I constantly struggle with the idea of making sure I have the money to pay for it and knowing (at least in my brain) that there is a very solid reason to have and more importantly utilize debt. Thanks for the great article!

  • I’m glad I checked in with your blog today. This was exactly the message I needed to hear. I’ve been feeling bad about debt lately, even though I see that I’m building something great….

  • Sam Thiessen

    Right on the money! Excellent observation about entrepreneurship, consumer credit, and the “gurus” who sometimes cause more harm than good.

  • Alexis, I so love the fact that you posted this and I totally agree.  

    Most entrepreneurs are so afraid of going into debt that they try to run a business with little to no money at all which puts them in the incredibly high-pressured situation of make money – like yesterday. 

    And that is an bad place to try and run a business let alone grow one to the next level. 
    I’d like to ad to what you are saying and take it a step further – Most people use their retirement, run up personal credit card debt and deplete savings to fund their businesses hoping that one day the business will make enough money to somehow pay it all back. When in fact there’s a better way.
    Your business can actually obtain it’s own credit so your 720 credit score stays in tact and you are not over loaded with credit card debt from the business or left holding the bag if your business idea is unsuccessful.  Given the fact that almost 90% of businesses fail in the fist 5 years because they lack capital choosing to avoid debt to grow your business because of what some guru said is playing russian roullete and the odds are not in your favor. Thanks for shining a light on the subject!

  • Aja McClanahan

    I can’t say that I agree. My first go around, I did the whole credit cards and bank loan thing. Was I the wisest person when I went about it? Probably not, but having done it again debt free, I can see that my decisions are much more clear-headed since I don’t have the pressure of debt lingering in the background. I have a lil more hustle in my step b/c, well, I’m using my own money! Rather than borrow to implement my next big idea, I’m looking for more customers and sales to finance my undertakings. If it doesn’t happen in the desired timing, I either step up my game or…..wait until I have the means to do it. The pace of growth is determined by how my business is actually doing and what I’m capable of, not forced projections of would I could do to service debt. The difference here is night and day. Consequently, I am making more money than I ever have doing business debt free. So glad I did it this way!