Dancing With Debt
One of the most frequents subjects/question that has come up with my clients and peers recently is:
"What should I do with my EIDL loan?"
My observation is that many gym owners have moved on from the mindset of using the money for what it was intended - a short term solution to keep the business afloat due to decreased revenues from Covid-19, or as a cash reserve as we move into fall and the unknowns of a "second wave".
Instead the thought process has evolved to "how can I spend it?" New equipment, building renovations, signage and marketing campaigns are all ways I have seen it being spent. In many cases credit was not previously available through normal channels prior to the assistance programs the government is now offering. Think about that. Your business could not support additional debt pre-pandemic. Revenues are down which triggers loan assistance under new government guidelines, often very large loans for a small business. What makes you think you are going to be able to afford to pay that loan back?
All too often we are in the "monthly payment" mindset. We've been "taught" by those who are in the business of selling on credit - car dealers and real estate agents come to mind. It's not about what you need, it's "what monthly payment can you afford?" Look I have been sucked into this too. The whole point of the dance with the credit manager is to see what the maximum monthly payment you can "afford" is, and then find a house, or car, or refrigerator that stretches the upper limit.
I've heard it more than once about the EIDL loan as well. The argument goes "It's only about $700/mo to pay back the $150,000 they gave me." Yes, that's true. Over 30 years and total interest of over $100,000! That's like buying another house. No thanks.
This is a relevant subject as we work our way through the Fix This Next Business Hierarchy of Needs.
Question #4 on the Profit Level is;
"When debt is used, is it used to generate predictable, increased profitability?"
Answering this question requires some discipline and work. When choosing to take on debt in your business, there needs to be a clearly defined and achievable increase in profits in a clearly defined time frame. There also needs to be ongoing measurements so when that isn't happening, you can take action by either adjusting the plan or pulling the plug on any more money being flushed. It''s the difference between "spending", and "investing". When you invest, you expect a return. I would suggest that every dollar you use be approached with this mindset.
My job is to help businesses create cash management systems that guide strategic thinking and decision making around their money. Dancing with Debt is Dangerous. You have to take the lead, not let debt take control. Know what you are getting into and why. Run projections that prove the debt you are taking on is an investment, not just a spend. Know when it's time to cut your losses. And always have a plan for paying it back.