There are plenty of bad four-letter words out there and if you are like me, you can’t seem to help using some of them at times. But “debt” shouldn’t be one of the ones to avoid. The truth is that we’ve been scared by pundits and talking heads about having any debt when in actuality debt can actually be a good thing. I call this “good debt.” Hear me out before you roll your eyes.
All our lives — both personal and professional — we’ve been told debt is terrible and to pay off any debt quickly, especially before we retire. To show you a different perspective, let’s look at one of my clients, for example. This client’s business was doing very well, yet the four partners were suddenly feeling pinched. This was a business that generated top-line revenue of close to $10 million a year, but somehow the cash flow had slowed. They weren’t able to fund their pension plan, costing them tax savings and ensuring they would work longer and harder. That’s something you never want to hear. People dream of retiring as soon as possible and retiring well. No one wants to have that messed with.
When I looked at their cash flow, one of the first things I saw is that they had bought some equipment in the previous year that cost $2 million. They’d gone to the bank to get a three-year loan on it. Why? Because they came from the “Let’s pay this off as quickly as possible” way of thinking about debt. Mind you, this equipment had a life expectancy of ten years or more, but they wanted to pay it off very quickly. They were paying out about $700,000 a year — and they wondered why they were short on cash! That’s a lot of their revenue, almost 10 percent of their top line. So, I advised them to go back to the bank and take out a ten-year loan. They did that, stretched out their principal payments, and, subsequently, were only paying a yearly amount of $200,000 in principal plus interest. Voila! Suddenly, their cash flow was back to near normal. They were able to fund their pension plan and accelerate their path to financial independence.
My advice is that before you decide to pay off debts quickly, think about how it’s going to affect other aspects of your business. How is it going to affect your goals, retirement, and business plan? What’s it going to do to your cash flow? Too many small businesses just don’t run the numbers. That’s a step that should never be skipped or missed. Don’t be the business that decides to make a drastic cost decision without checking to see if it’ll have an adverse effect on your cash flow. But I encourage you to use this four-letter word! It can save your cash flow.
For more information on using debt to your advantage, visit tswealth.com.