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How Do Businesses Stay Debt Free?

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Have you ever thought about starting your own business? I assume that you’ve thought of how much it might cost you to start the business, but have you ever thought about whether you would run it debt free or not? There are a handful of businesses out there that operate 100% debt free. Among these are American Express (doesn’t this one seem odd to you? They promote credit as a business, but make it a point not to borrow themselves), Apple. Amazon.com, Bed Bath and Beyond, and MasterCard (again, strange), just to name a few. So how can a business do this? Isn’t it necessary to get a loan to thrive in today’s business world?

It’s Not Easy

While it’s true that some businesses have built quite an empire without credit, but it certainly isn’t easy. If you own a business that is limited to its own assets and you are trying to compete against a large corporation that can borrow $2 billion tomorrow, the odds are certainly stacked against you. However, if you can overcome the odds and build you business to a sizable structure, staying debt free can actually give you an edge over your debt loaded competitors.

Think About It

Let’s imagine that you own a small hot dog business in your city and you have a competitor that sells the exact same items only a couple of blocks away. Your set up is the same, you both employ the same number of people, and the only edge you could have over this competitor is the price that you charge for your hot dogs.

Well, you have scrimped and saved for your hot dog business over the past few years, and currently, you have absolutely no debt. Your competitor, on the other hand, has quickly grown into his business, but in the process has developed $200,000 in debt. As you may have guessed, this obviously cuts into his profits and he therefore cannot sell his hot dogs as cheaply as you can and survive. He must charge a higher price to cover his general costs and hit debt payments.

The same is true for the larger corporations. The less debt they have, the fewer expenses they need to cover each month, which means they have more flexibility when it comes to drastic changes in the business.

How Do They Stay Debt Free?

This question is quite simple to answer, really. The business needs to start small to keep the costs low, and when orders pick up and revenue increases, then the business can grow by paying cash. If you’re ever curious whether a business is driving toward a debt free operation, simply look at cash flow management. When there are dollars being spent that they do not currently have, the business is obviously cycling away from debt freedom.

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AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

3 Comments

  1. Even though it goes against ideal , debt free is not always the best way for a small business. You certainly don’t want to over extend yourself, but taxes will eat you alive if you do make any money. For example, sometimes it makes sense to lease equipment rather than tie all your cash up in a purchase. Then if you do have a down turn, you have money in the bank. It also might make sense to purchase a space rather than rent if you need a brick and mortar building. Just two examples I can think of. I only know small business though. American Express is another story!

  2. We grew our small business slowly without debt. We could have been bigger, bolder and brazen – but in the end – would we have been as profitable over the LONG term?
    I watched a sign business next door invest heavily to have presence and equipment to do just about any job, 5 years later they were bankrupt and owed everyone. He used personal credit lines, and in the end they did sink themselves – but it’s not always the way it works. The owner tried to do everything he could (partnerships, sales reps, advertising) – and yet the one thing he never would do was cut his price. Personally I think it was the one thing he should have done – not to be cheap, just competitive in the market.
    There is no one size fits all.

    • Sounds like you did a great job in business Johannah! Always appreciate your comments.


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