Entrepreneur Beginners Guide
“Manage Debt Well”
Rather go to bed without dinner than to rise in debt. —Benjamin Franklin, entrepreneur; Founding Father, United States of America
Years ago, when I was just out of college, I saw an ad in a local Atlanta newspaper that promoted a bank’s new business line of credit product. Soon after, I thought I would apply for it. I stopped by the bank’s closest branch, filled out the one-page application, and returned it to the banker, not knowing what to expect. In just a few minutes, the banker hung up the phone and told me the verdict. She looked at me with a big smile and said, “You were approved for $18,000.” Just a few minutes later, I walked out of the bank with a business line of credit for $18,000. Combined with another business line and credit cards I received from other banks, I had about $45,000 to fund my next big idea. I was excited and horrified at the same time.
Growing up, I learned the importance of managing my personal finances well. My father, who often boasted of having “Al” credit, instilled in my siblings and me that a well-managed financial life is a good life. He worked in the credit department of a major retail store for decades, so discussing money and credit in our household was normal. I suppose he was determined to teach his kids how to avoid the bad financial situations that he witnessed daily at work. Specifically, he taught us to pay our bills on time-before the grace period—and to never incur more debt than we can pay back in a reasonable time. I never imagined that I would be leveraging credit in the tens of thousands of dollars to realize my business dreams. If I had asked my dad, he probably would have discouraged me from incurring so much debt at such a young age. It wouldn’t have mattered; I was determined and ready to assume the risk. Luckily, my business idea was highly profitable, and I was able to service all debt that I assumed.
Research indicates that the, great majority of entrepreneurs will never receive money from a venture capitalist or an angel investor. Instead, they will fund their businesses with their own money and via credit cards. According to a repOrt by the National Federation of Independent Business, in 2009, 83 percent of businesses with fitly employees or fewer used credit cards. This point is important, because how you manage your personal finances determines how much money you can borrow for your business and at what interest rate. In my case, I received access to $45,000 in large part because my father helped me to build a solid credit history from a young age. When I applied for the business lines of credit and credit cards, I received a substantial amount of money at a competitive interest rate because thy personal credit was good.
How one manages personal debt is a good indicator of how business debt will be managed. For that reason, banks and other creditors check your personal credit when assessing your credit-worthiness for a business loan product. Similarly, I often vet entrepreneurs by learning about their personal finances. Like the banks, I am less likely to invest in people who can’t manage their own finances well, regardless of how great the idea or how large the profit margins.
Over the years I’ve learned that “debt” is not such a dirty word. You just have to know how to use it. I wasn’t able to change my perspective until I began to conquer my debt. Currently, I have no car note, no student loans, and no credit card debt. Aside from my mortgage, I am debt free. Last time I checked, my FICO score was 813, in the top 10 percent. Likewise, my business maintains a healthy debt-to-income ratio, and all of our accounts are in good standing.
The best entrepreneurs manage their personal debt well. Also, they find the best money mentors or financial gurus to help put them in a position of maximum financial leverage. Undercapitalization continues to be the main reason so many businesses fail. Considering this, you want to ensure that you do everything you 150 can to maximize your chances of success. Yes, it’s important to have a good idea and eventually a profitable business, but following the right financial path to get there is critical, too.