Originally Posted by Duekster
I suspect he is talking about building credit so you leverage growth in the future. I do a mixture of credit and cash.
Yes, this is correct.
I will provide an example of a business owner I worked with for a few years.
When I first met him he offered aeration only services, had a couple used aerators, paid cash for everything he had. His growth was mostly word of mouth and he took on the work he could handle. He had his business for about 5 years and he told me he consistently picked up about 50 customers per year, thus the 250.
I asked him what his long term plans were. He said he did not want to stay in the business and wanted to sell and go back to school.
I suggested he grow his business, and he said he had no money to do this. I suggested credit - as long as it was used responsibly he would be able to significantly increase the size of his business and when it did come time to sell he would have a lot more to walk away with. On top of that, if he made the decision to grow, his aeration income could be his only income since he also had a part time job.
After a lot of back and forth, he finally took my advice. Three years later he had 2,500 aeration clients and sold his business.
Do the math....
When we met he had 250 clients and no debt. He was growing at 50 clients per year. So after three years he would have had another 150 clients, or 400 total, and no debt.
Instead, he incurred around $88,000 in debt for equipment, trucks, marketing, etc. As I said earlier, in 3 years he grew his business from 250 customers to 2,500. Keep in mind he was also able to pay himself very well and was able to quit his other job.
He sold his clients for $115 each on average (this included trucks and equipment) - total sale of his business was $287,500 less the $88,000 in debt he had and before taxes he walked away with $199,500.
If he would have kept doing things his way, without using debt to grow his business, using the same numbers, he would have sold 400 clients for $115 each, totaling $46,000.
Using OPM (other people's money) is the best way to grow a business.
It still ultimately comes down to having a plan, not abusing the credit, and making sure you use the credit effectively.