Debt can either be a terrifying word or a powerful business tool. Depending on your beliefs and willingness to take on extra debt, you can learn to harness it to grow your business faster than ever before. There are multiple avenues open to business owners, from business loans to credit cards, but before you borrow other people’s money, follow these tips to catapult your business in the right direction.

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The Full Conversation

(With your hosts Andrew Youderian of eCommerceFuel.com and Bill D’Alessandro, of RebelCEO.com.)

Andrew: Thank you so much for tuning in today. And today I’m really excited for this topic. It’s something that I feel passionately about, my guest feels passionately, about and it’s debt, business debt in particular. Is it good? Is it bad? Can you use it healthily? Can you use it responsibly? Or is it all around just a bad deal? And joining me, a man just coming off an enormous shopping spree at the mall financed completely on plastic, Mr. Bill D’Alessandro from Rebelceo.com. How are you doing Bill?

Bill: Doing good. This should be an interesting discussion. I know we have some similar views and also some very different views on the use of debt in your business, so I’m excited to talk about it.

Andrew: Yeah, and I think most people know who listen, but it bears repeating, we come from the world of finance where debt is a very commonly used instrument for acquisition especially for you if you’re in the private equity world and that kind of stuff. We’ve seen it personalized and we’ve also seen it in much higher scale than what we operate on in business, so it would be interesting to look at it from that perspective as well. So we are going to go ahead and dive right into this discussion on debt.

So, Bill I think probably right out of the gates we should probably mention that there’s a lot of bad kinds of debt that we do not endorse in any way. Credit card debt for consumer spending like I was teasing you about at the beginning, lots of heavy consumer debt, debt for bling bling, your finance escalates for sales calls, not a good call. We’re talking about, in this episode at least, business debt that hopefully you can use responsibly to grow your business and debt that can produce a return on investment.

Bill: I think that’s really the bottom line on, if you wanted to say in one sentence what makes responsible use of debt, responsible debt is debt that you take on that allows you to grow your business in a way that you otherwise would not have not been able to do.

Personal Experiences with Debt

Andrew: Before we get into the nitty gritty, can we maybe talk about just our high level experiences with or mindset behind debt so people and it’ll become apparent pretty quickly I think. But what’s your high level 30,000 foot view on debt and maybe any of your experience with it in general.

Bill: My experience on debt is that it’s a very powerful tool, period. And like all powerful tools, it can be used to ruin yourself or to vault yourself to the next level. The reason you’ll very often hear debt referred to as leverage is because it is just that. It’s like a long leverage, magnifies outcomes. It allows you to buy. For example, everyone who’s familiar with this is buying a house and nobody pays cash for a house. If you were to say you have all the money to buy a house in cash, very few people would buy houses. But debt allows you to put a small amount of money down and purchase the house. It allows you to magnify your outcome. And similarly if the house loses only very little bit of value, you can lose the entire house because you still have to pay the loan. But if the house goes up in value, you could make a lot of money because you only had to put down a little bit of money in the beginning and that’s the leverage of debt. That’s the magnification of the outcome. If you use it responsibly, I believe that debt can be a very, very powerful tool to grow your business and that’s everything from sort of line of credit, if you’re in inventory business, where you’re buying inventory, you might need to stock up before the season and you might not have all the cash in hand to do that, you might want to buy inventory and pay it down as the season goes by. That’s a valuable use of debt. You might want to do it in acquisition. Myself, personally I have used to debt to do two separate acquisitions over the past couple of years and I know we’ll get into that over the next couple of minutes. I have used a lot of different types of debt. We have a line of credit in our business, I’ve used an SBA loan, I’ve used a little bit of seller financing, I’ve used a variety of different debt types and they’ve all worked out. I would not be where I am today without debt. I am pro debt and on the other side of the table…

Andrew: The other side of the table. My experience, I think it’s difficult because in business, I’ve never used debt at all and I think it’s really shaped by my upbringing and just personal experience but especially my upbringing. Just like debt in my household was something that was heavily, very heavily warned against. I remember coming out of school, my beater car hit a deer three months into my job, stone broke and I remember going over to the dealership and I was looking to a buy a five, six thousand dollar car, could have easily afforded the payments but walked away because I didn’t feel comfortable taking on debt for that car. It was almost like a line in the sand I didn’t want to cross and much more on don’t take on the risk, pay off the house, really work on getting your debts eliminated and just being able to build up cash and getting rid of payments. On one hand I think it’s great because you do hear about people who abuse debt, get themselves into enormous holes and it causes a ton of pain. On the other side, though, I think, Bill, you could make a very good argument especially given your experience that I’ve limited my growth, limited maybe some of my opportunities in that way. It will be interesting. I’m excited. This is something you have more experience than I do. And I say it in the best way possible because known it responsibly but I’m interested to dive into this because it’s something that is psychologically for better or for worse. I’ve always had a little bit of an advesion to.

Bill: I don’t think that’s a bad thing. I think a lot of people listening probably feel that way. If you’re a responsible human being you probably have been raised to be a little bit scared of debt because you’ve seen it go bad. We saw it go bad for the entire country in 2008/2009.

Andrew: Entire world.

Bill: Entire world, yeah. To be afraid of debt is a good thing. You should be afraid of debt, you can ruin yourself with debt. But that being said, as I said before, it’s a very powerful tool.

Loans from Family & Friends

Andrew: Yeah, I think where I’d love to structure this Bill is let’s talk about four or five different ways that you can get financing in business, some of those different debt structures. Talk about them and kind of dive in deep. So the first one is loans from family and friends. This is one where…man, I may have just given a way my entire thought.

Bill: This one in summary…sigh.

Andrew: This one is summary. Did I do it. Are you on the same page with this? Have you done this?And if not, have you had friends or family that you’ve seen done it where it turned out well? It just seems like it’s so littered with potential mine fields.

Bill: It is completely littered with potential mine fields. That being said I have done it. I, initially in the very beginning, borrowed some money from my family in order to get my business off the ground. I did it, though, being that I was aware of the potential pitfalls. We did it in a very arms length way. There was a written contract, there was an interest rate, there was a payment schedule. It was very much a defined contract. It was as though it was an arms length transaction with a third party investor. Loans from friends and family can be great and the reason they’re great is because those people implicitly trust you so you don’t need a crazy underwriting process with the bank. The reason they can be bad is they’ve ruined relationships and families. The downside, if you default on a bank loan, at worse they put you through bankruptcy but it doesn’t ruin your marriage or your relationship with your parents or relationship with your friends. There’s just a lot of personal downside in the friends and family loan. If it is your only option, I’m not going to say don’t do it but if you do something with family and friends, I would do it as armed length as possible, not just, “Oh you’re going to invest X in my company and maybe I’ll pay you back eventually.” You really need to figure out what a market rate is for debt, what kind of interest rate is fair. This perso