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.
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.