Is it better to finance your business with your own money or debt?
Entrepreneurs ponder whether using your own cash or someone else’s is best
“It depends on how fast you want to grow and how deep your pockets are. If you choose to grow organically by using your own money, you will not likely grow as fast as you would if you engage a financial partner, whether that partner is a bank providing debt financing, equity partners, grants, angel investors or asset based lenders who provide factoring etc.” Judy Perdomo, president, Liquid Capital Rockyview Inc., lcrockyview.liquidcapitalcorp.com
“Personally, I think it depends on the business. I was fortunate to start mine as a hobby and created a few items for friends and family when, over the years, word-of-mouth turned my hobby into a business. I already had the basic equipment and with each sale I was able to re-invest some of the profit into more supplies. After a year of sales, I was able to purchase an industrial embroidery machine which gave me more time to create as it cuts down on my production time. A portion of my sales always goes back into business costs and I feel very fortunate not to have incurred any debt.” Valery Klassen, owner and designer, Sun 7 Designs, sun7designs.com
“Financing with personal capital may be the safer option, but may not help motivate a business owner to keep moving forward. Taking a small business loan, on the other hand, can be a fantastic motivator. As soon as you take the loan, you commit to repay by a certain date. You must do everything you can to make your businesses viable in order to generate the cash necessary to pay back the loan. Debt can be a fantastic commitment tool when used in this manner.” John Pitchko, president, Pitchko Media, pitchkomedia.com
“A careful balance is required. That is why lenders like us look at debt/equity calculations, for example. The higher the ratio, the riskier the company. I found that this became especially apparent in the current downturn. Debt can help you grow and capitalize on opportunities, but if sales and cashflow decrease, you want equity in your company and your assets as well as ample debt service coverage in order to be able to weather the storm. Leverage can hurt and help, use it wisely.” Danilo Terra, president and founder, Danilo Terra Capital Strategies Corp., daniloterra.com
“When I started my business, I had immediate revenue but I had no liquid cash. So, in my case, I purchased operational assets with lease financing. Leasing gave me access to money to buy the necessary equipment I needed. Looking back, if I had the available cash, I still would have leased, it helped my business establish a credit rating that we might need to leverage in the future, but for now, we use our own money for any expansion.” Vince Fowler, head coach, Vested Interest Group, vestedinterestgroup.com
“This really comes down to how much the loss of this money would affect you. If you lost a couple hundred or thousand dollars would you be bankrupt? Probably not, so in this case it would make more sense to self-fund. If you sold everything to raise $100,000, and then lost it all, you’d probably be in a lot more trouble. In this case it might make more sense to borrow the money, as monthly payments would be more manageable in terms of cash flow.” Boris Vujanovic, co-owner, A Proactive Driving School, driveproactive.com
“Growing up my dad would tell us to sacrifice present pleasures for future benefits. I think the process of saving and growing your business based on investing (and reinvesting) your own money makes you much more conscious of what you are spending the business’ and your money on. I find it interesting when people say to lease things that aren’t necessary for the business, because you can write off the lease payment, yet as an entrepreneur the business is you. At the end of the day, whether we write off certain expenses or not, the reality is that we have to earn that money in the first place. As long as we can keep this view of being responsible for our financial decisions and treating all money as if we earned it through hard work, then using debt wisely can be a good option. As businesses grow, maintaining this mindset helps us make better financial decisions for the longevity of our companies. This provides a solid foundation to grow on.” Karla Mayfield, vice president, Mayfield Renovations Ltd., mayfieldrenovations.com
“When I started my business recently, my answer would definitely have been with my own money. After researching this very topic, it has become clear to me that I believe it is better to finance your business with debt. When you self-fund a business although you may find it ‘cheaper’ because you are on top of all expenses and can find yourself being very frugal with what you spend, in the long run it will actually cost you.” Lucy Dunne, founder, Dunnebells, dunnebells.com
The above answers are in response to a question posed by Teresa Clouston, executive vice-president of ATB Business (atb.com/ business). Here’s her advice: “If cash is king, perhaps debt plays the role of the knights’ round table. Most entrepreneurs place a major bet on their business by making a major commitment of their own money, usually in the early stages. This makes you omnipotent - 100% in control, and accountable, for success of the business – that’s pretty powerful. But using others’ money (including debt) allows you increase the investment in the business, leverage the cost of borrowing to offset taxes, and potentially limit your personal liability. Financiers will always want the business owner to have ‘skin in the game’ – from both a financial stability, and commitment to the business model perspective.”