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Old 11-15-2012, 12:38 AM
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GreenI.A. GreenI.A. is online now
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Join Date: Jul 2010
Location: North East
Posts: 2,024
guys will argue back and forth on here about weather to use credit or not. I used it, and grew my company from me being by myself to 17 employees (fulltime, parttime, season) at the peak of the season. I did that in less than 3 seasons. I formed my LLC in 09 and started parttime. Lost my full time job in the fall of 09, so I took my business full time at that point. If I was still trying to do it with 100% cash, I woudn't be as far as I am now.

The thing is with credit, you have to keep in mind that it is a business tool and should be used as such. If your budget says you can afford a $1,000 a month in payments, then don't take financing that is going to be $1,000 a month. Finance less, so that if you have a bad month, or loose a couple accounts, you can still cover your bills.

The reason I said I would finance the truck and equipment and save the cash for marketing and stuff is this. Many guys will pay cash for the truck, but then when they want to send out flyers they may not have the extra cash and put it on a credit card. Or worse, they loose the engine in their truck and have to replace it and their only option is to put 5,000 on credit cards. I would much rather pay 3% on a truck note than be paying 14% on a credit card. Obviously everyone is different, I have a low interest card with great perks so I tend to use it more often.

Heres the simple way I look at it. Say have 10k to spend on a truck. You can get a fairly descent amount of truck for that. But you are going to have to give up things to get a more capable truck. Do you want a newer truck? then you will have to go with a smaller model, higher miles, more dings, less options. With a smaller truck you are going to have much more wear and tear pulling a heavy trailer. Do you want a larger model like a 3/4 or 1 ton, then to stay in your budget you will be looking at higher miles, older year, etc. With older models and more mileage you are going to be at higher maintenance costs. Are you going to need to replace the suspension in 6 months? Maybe the suspension seems fine, but with 100k miles on the truck there is more of a chance of some moderate wear that is going to cut into tire life.

Now say instead of searching for the perfect truck that is 10k, you get a loan and decide to spend in the range of 12-15k to get a larger truck that will take the abuse and is in better condition, with less expectation of future maintenance costs.

I'll use the example of a 15,000 loan. If you get a 5% loan for 4 years, you will pay a total of 1,581 in interest over the life of the loan. Thats averages out to $33 a month you will pay in interest. If you can afford to throw an extra $100 in the payment each month you will save $385 in interest, and have it paid off in only 37 months.

Some guys would throw their cash down and pay the 15k up front and save the interest. I would rather pay that extra $33 a month to keep my money in my account. I could spend 10k elsewhere for company overhead, and save 5k in the bank for an emergency. That 5k would cover 14months of loan payments, if I got injured and couldn't bring in revenue.

Where guys go wrong with credit is they assume they will always have the revenue coming in. So for the example I just gave. They take that 15k loan for the truck with a $345 a month payment, but don't put anything away to cover it, because "I could afford $350 this month and I'll definitely grow more next year". But then they have a bad winter with no snow, or business doesn't grow next year, maybe they loose sales. But they were so confident, they didn't keep any of that cash in the bank for emergencies. They miss some payments, there great 5% interest rate now shot up to 14% and they have other finance fees for non/late payments. They know they can't work without the truck, so they have to find the money elsewhere to cover the truck bill. Maybe they miss some credit card payments so they can get the truck back on tract. But now they are paying more fees on the credit cards. This because a vicious cycle of robbing Peter to pay Paul until business picks up and they can get back ahead of everything.

Like I said, we utilize credit when it is benefitial to us, 2% loan on a 35k truck, 5% interest credit line when the vendor gives us 15% discount for buying in bulk. But I also know that I could go a minimum of 2 months with out any revenue and would be able to draw of our capitol to cover every bill we have and all overhead. If I needed to go longer than 2 months without revenue, I could then do layoffs and cut certain expenses, which would allow me to still be able to cover our monthly bills. By the time my capitol gets low enough that we couldn't afford our bills, I would have had enough time to liquidate enough assets to secure more funds.
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