Using credit to run a company

[mobil1syn]

For personal finance I am aligned with Mr. Ramsey. If you cant pay cash, you shouldn't own it less its your mortgage which is within reason to your income. He also takes the position that companies should run on cash as well, which I agree with on principal. The past couple of companies I have worked at, the owners have openly answered my questions about cash flow, business model, a lot of details on how things function, etc which I am very appreciative of. I currently work for an industrial equipment OEM, mostly large refrigeration systems and gas compression systems for chemical process. Most of our jobs are 40-60 weeks schedules with budgets in the 1-5 million range. We usually have 3-5 projects going at a time, so the AP is pretty substantial as a each job has a handful of expensive long lead items.

So for the people involved at the higher level of larger companies, what is the strategic purpose of leveraging credit when running a company? Is there a downside to taking a cash position in a company that does north of a 10 million a year? Is there a cross over point in the revenue number that would dictate the change? Does the type of business have an effect?

 

[dnsfailure]

I have no clue. But something I find interesting is this. Apple has something like 90 billion in debt. BUT, they also have something like 240 billion in CASH!

So.... why don't they just pay off that debt? It must be strategic somehow, to keep the debt there? Tax reasons?

Anyway, sorry, that's not helpful to your question.

 

[rockota]

debt is deductible...

 

[grumpy356]

Never use your own money.

The dumb schmuck who’s trying to save a few dollars for retirement, fine pay cash. The people who accumulate real wealth do it through leverage.

 

[mobil1syn]

I have no clue. But something I find interesting is this. Apple has something like 90 billion in debt. BUT, they also have something like 240 billion in CASH!

So.... why don't they just pay off that debt? It must be strategic somehow, to keep the debt there? Tax reasons?

Anyway, sorry, that's not helpful to your question.

that plays into, because i have heard the same thing. i think google is cash positive as well.

 

[Black Sabbath]

I would say in theory if you can make more money off of a borrowed dollar then that dollar costs you, you should borrow every dollar you can. Clearly this comes with a risk component but lets say your company only had enough cash flow to finance one of those projects at a time by themselves. So for every project after that they are making profit minus financial costs at the expense of risk, which is free as long as you pull it off. How you decide you specific case and risk profile well that is where your business soars or sinks.

 

[Black Sabbath]

I have no clue. But something I find interesting is this. Apple has something like 90 billion in debt. BUT, they also have something like 240 billion in CASH!

So.... why don't they just pay off that debt? It must be strategic somehow, to keep the debt there? Tax reasons?

Anyway, sorry, that's not helpful to your question.

Big business accounting rarely makes sense if you only glance at it. Really that "cash" they have is likely tied up in other liquid assets, like government bonds, that are kicking out some sort of profit to a subsidiary in some low tax shelter making a higher percentage then the current loan rates are costing them when factoring in repatriating the money into a higher tax area like the US. I guarantee someone with a high dollar degree has done and redone that math.

Also sometimes it just makes sense to borrow a few billion dollars today at favorable rates for expense you see coming up tomorrow when the whole thing might turn to shit an no one will lend you a dime or it will cost you twice as much to borrow.

 

[Norm]

Yep. The down side is that it's easy to get buried if something goes off the rails a bit.

Most companies have several levels of debt, long term capitol and operating. If you have a 10 million dollar order, and need 8 million to buy raw stock and 1 million in payroll to fill the order , that's operating short term debt. Now the 20 million dollar building you are working in and the machines in it are long term debt. Where things go south in most companies is not having enough cash balance to handle the payments if something goes south like orders being delayed, a order gap, kungfoo flu shuts them down for a while, slow year, etc.

It's almost impossible to build a company without taking on debt. Even if you have cash, it's better to risk someone else's money if things go south. Trump got rich by leveraging other peoples money, not his own.

 

[grumpy356]

Yep. The down side is that it's easy to get buried if something goes off the rails a bit.

But you can feel however you want to about bankruptcy. It’s legal. Sometimes it’s even healthy. The law really doesn’t care about what morality you attached to it.

 

[Projectjunkie]

I've been thinking about this, I'm debt free, considering buying a skid steer and dump trailer on credit versus paying cash for used. Just kinda waiting and watching

 

[Slander]

I worked for an airline and my team decided what capital equipment to replace for a "small" segment of the business, $250million per year. My personal department operational slush fund budget was $2million. The way the finance team described it to me, because I asked the same questions as you, is borrowing money is cheap right now. They would use debt to finance capital projects and used a lot of the profit to buy back stock and fund raises and bonuses. This was good when times were good, sucks when shit goes south like you see now and they have a limited cash reserve. Companies also hold a high debt load to make them unattractive to takeover. Airlines are super capital intensive so they operate in kind of bizzaro finance world.

you are seeing companies put things on the credit card because interest rates are zero, and thus almost zero for the borrower. It's the corporate version of why pay cash for a new car, when I can finance it for .9% and use that car money to remodel the house that's an appreciateing asset. Thats a super super super simple analogy for the craziness that's corporate finance. We are also now seeing the results of that which is an economy being propped up by the fed, and this is also why QE by them is a terrible idea in the short, medium and long term.

 

[Projectjunkie]

I worked for good sized earth moving company, competitive with the nationwide guys for a third of the state, probably had 400+ pieces of cat equipment, and as far as I know was debt free. Owned by one guy, once he bought out his ex wife:rolleyes:

Story was he boomed and busted in the 80s on credit and started over cash only. Ran a tight ship, had a powertrain rebuild shop in house, in house paint shop. Machines would cycle thru, get broken apart, mechanics would re hose, rebuild cylinders and replace bearings etc while the engine and tranny were getting rebuilt, once it wad back together and made a yard lap it went for paint and decals

always respected the way he did things

 

[bigun]

Elecrical contractor I worked for used to go out and get a loan when he started a job, worked out okay till he keeled over from a heart attack. Last time I talked to his wife she was a cashier at Home Depot, she said she was just barely able through the sale of the company and some property they had to pay off all the money, and now she was back to work

 

[Will12785]

I have no clue. But something I find interesting is this. Apple has something like 90 billion in debt. BUT, they also have something like 240 billion in CASH!

So.... why don't they just pay off that debt? It must be strategic somehow, to keep the debt there? Tax reasons?

Anyway, sorry, that's not helpful to your question.

Apple has debt because it is cheaper to take out loans for their expenses than pay the taxes to move their cash out of their tax shelter.

 

[Will12785]

Dave Ramsey is a good guide for simple savings and life planning, but his philosophy leaves a lot of money on the table.

 

[Tin Roof]

I can’t operate cash only because I always have a high AR amount. Right now I have $900k in AR and about $20k in the bank. $5-600k of that I should be seeing payment on within the next 30-60 days. But, I’ll likely have to dip into my operating LOC within the next 30 days to keep up with AP. The LOC is usually paid off within 60 days when I do have to use it.

Jobs having retainage amounts doesn’t help. On a $3mill project the GC can hold $300k till all punchlist and close out items are complete and the owner rep releases retainage. I could have all my shit done and still wait months for everyone else to finish theirs. A couple years ago I waited 9 months after I completed a project to receive my $200k retainage. 3 or 4 projects like that makes your AR look terrible.

 

[evernoob]

Never use your own money.

The dumb schmuck who’s trying to save a few dollars for retirement, fine pay cash. The people who accumulate real wealth do it through leverage.

I don't think that the guy down at the Power Company who's saving for retirement is a dumb schmuck. Not everyone wants to be a tycoon.

Also, the book Millionaire Next Door says you're wrong. In fact, by numbers, more 'wealthy' people accumulate their money using some variation of 'pay cash' to do it. Unless you don't consider 7-8 figures 'real wealth'.

at the other end of the scale....

Bill Gates, afaik, did not use leverage to accumulate his wealth, and many people including myself think he's still the richest man on Earth by no small margin. Bill Gates used cheating and lying to accumulate his wealth. However, the development leads on MS products were not financed, they were ensured by exclusionary non-compete agreements with PC manufacturers.

If you were in the Oil business over the last 20 years you used 'leverage' to build your wealth, if you built any, and that business dropped out of the bottom when the finance cost edged over the market value of oil, about 90 days ago. They shouldn't be bailed out, just like Cruise lines.

 

[grumpy356]

I don't think that the guy down at the Power Company who's saving for retirement is a dumb schmuck. Not everyone wants to be a tycoon.

Also, the book Millionaire Next Door says you're wrong. In fact, by numbers, more 'wealthy' people accumulate their money using some variation of 'pay cash' to do it. Unless you don't consider 7-8 figures 'real wealth'.

at the other end of the scale....

Bill Gates, afaik, did not use leverage to accumulate his wealth, and many people including myself think he's still the richest man on Earth by no small margin. Bill Gates used cheating and lying to accumulate his wealth. However, the development leads on MS products were not financed, they were ensured by exclusionary non-compete agreements with PC manufacturers.

If you were in the Oil business over the last 20 years you used 'leverage' to build your wealth, if you built any, and that business dropped out of the bottom when the finance cost edged over the market value of oil, about 90 days ago. They shouldn't be bailed out, just like Cruise lines.

A milliin dollars isnt wealthy. It’s comfortable.

And Bill Gates got wealthy by selling a operating system he didn’t own.
He sold it, then he bought “Down and dirty operating system” from some guy in Seattle I think. He eventually shortened DDOS to DOS


Dave Ramsey is a cult leader.

 

[evernoob]

A milliin dollars isnt wealthy. It’s comfortable.

And Bill Gates got wealthy by selling a operating system he didn’t own.
He sold it, then he bought “Down and dirty operating system” from some guy in Seattle I think. He eventually shortened DDOS to DOS


Dave Ramsey is a cult leader.

Those are all nice sentiments. Ok 1 million (with an 'o') dollars is not wealthy, it's comfortable. 99 million dollars is wealthy, no? Or is that too poor for your caste?

I understand the story of Bill Gates, you went backwards. Long after Bill bought DOS for $50,000 and sold it to IBM, he became a Billionaire. When becomeing a Billionaire (is that wealthy enough for you?), he did not use financing to protect Microsoft's revenue flow and develop new products. He used guaranteed future sales by NCAs with Dell and HP. This allowed him to accumulate wealth much faster than the traditonally-financed companies he was competing with, who used leveraged money as you are describing.

Please keep up, Daddy Warbucks.

 

[mobil1syn]

I can’t operate cash only because I always have a high AR amount. Right now I have $900k in AR and about $20k in the bank. $5-600k of that I should be seeing payment on within the next 30-60 days. But, I’ll likely have to dip into my operating LOC within the next 30 days to keep up with AP. The LOC is usually paid off within 60 days when I do have to use it.

Jobs having retainage amounts doesn’t help. On a $3mill project the GC can hold $300k till all punchlist and close out items are complete and the owner rep releases retainage. I could have all my shit done and still wait months for everyone else to finish theirs. A couple years ago I waited 9 months after I completed a project to receive my $200k retainage. 3 or 4 projects like that makes your AR look terrible.

if you wouldnt mind sharing what you do and yearly revenue?

i worked for a gate company for a short period of time who refused to do new installs for that exact reason.

 

[Fullsize80cherokee]

The guy who taught me the business side of electrical contracting told me to never take on any debt and so far I’ve been taking his advice but being the piggy bank for GC‘a is tough sometimes. Not having credit accounts at supply houses is probably hurting my pricing on stuff but other than that I see no downside to operating without debt.

 

[Tin Roof]

if you wouldnt mind sharing what you do and yearly revenue?

i worked for a gate company for a short period of time who refused to do new installs for that exact reason.

Construction trade contractor. $3-5mill annually.

 

[mobil1syn]

Never use your own money.

The dumb schmuck who’s trying to save a few dollars for retirement, fine pay cash. The people who accumulate real wealth do it through leverage.

There is some truth in what you are saying, which is where I am reconsidering my opinion on the matter. Leveraging is tool, use it wisely and it can benefit you, use it incorrectly or carelessly and it will ruin you.

People see action sports athletes as careless crazy people with a death wish. When you start digging into their lives, what you find is they have developed a skill set that allows them to redefine risk. The level of risk Travis Pastrana takes flipping his dirt bike is arguably lower than mine driving home from work. There are successful people who have found ways to 'cap the downsize' as Tim Ferriss would say in playing the leverage game be it with multiple companies, creative financing, or other things.

Id argue there are a lot companies who take on debt because they think it makes them successful even though they dont need to and it limits there ability to reach the next level. While others hold out because they are afraid of the risk and are willing to limit their ability to reach for the next level of success because of the safety.

 

[Tin Roof]

The guy who taught me the business side of electrical contracting told me to never take on any debt and so far I’ve been taking his advice but being the piggy bank for GC‘a is tough sometimes. Not having credit accounts at supply houses is probably hurting my pricing on stuff but other than that I see no downside to operating without debt.

I’ve only seen special pricing based on volume, not credit. We pay off vendors within 15 days to get a discount. But, if I’m buying $1.5mill/year consistently from a specific vendor I get better deals than someone buying $100k/yr. My outside salesman can drop his markup a couple points on me and still come out ok due to volume.

 

[Fullsize80cherokee]

I’ve only seen special pricing based on volume, not credit. We pay off vendors within 15 days to get a discount. But, if I’m buying $1.5mill/year consistently from a specific vendor I get better deals than someone buying $100k/yr. My outside salesman can drop his markup a couple points on me and still come out ok due to volume.

Yea I worked for a 250 person company for a few years and the supply house people pretty much suck your dick to get your business when you’re their bread and butter like that.. I struggle to even get shit delivered to the job.

 

[Gatorgrizz27]

I don’t claim to be any sort of expert, but I’ve seen a few things and this is how I choose to run my small business.

I prefer to operate debt free, I’ve been in the position of getting hurt, not being able to work, and having stuff from jobs put on credit cards. Didn’t have disability insurance, but it’s expensive enough that you’re better off putting that monthly premium in a savings account IMO. I’ve also seen companies with huge overhead costs doing jobs at a net loss just to keep money flowing. I could say “fuck it”, and quit tomorrow, or just take a break and travel out west for a few months with only my shop rent to pay.

I take a 50% deposit when a start a job, then the other 50% when it’s done. I’m not tying up my own cash in materials, if you do that it’s possible to temporarily run out of money even though there’s a ton in the pipe. It also takes a lot of the stress of when people are slow to pay or you can’t get ahold of them for a bit.

My method for buying high dollar tools has been bidding on a job that required it, then buying it when I got the contract. I’m now reaching the point where that’s not possible with more expensive stuff. It’s not a bad idea to borrow money to expand a business where you’ve already had success and steady work or sales. It’s not a great idea generally to go into a ton of debt to start a business and then hope your phone rings so you can pay your bills. There are times when it’s a good idea to borrow money at low enough interest when you’ve got other things you need to pay cash for.

Also, Dave Ramsey’s advice is solid, but it’s meant for people who are bad with money. If someone’s a full blown alcoholic and has no self control, they should probably just quit drinking. If somebody occasionally drinks excessively and needs to reign it in a little bit, they don’t need to follow the same plan.

 

[Hooligan]

There could be defined points to borrow- if there is a defined point to pay it back. Like a revolving line as noted above to fund the job until AR is collected. Or the ROI on a piece of equipment with an amortizing loan warrants.

I’m in the midst of turning a company around that borrowed to fund loss years, but there was never a plan to repay it. So years later, and many loans later, the bank interest is our largest vendor. As Dave Ramsey would say, I have a large hole and a small shovel. My job to crate a larger shovel.

 

[det107]

The people who accumulate real wealth do it through leverage.

"The pen is mightier than the sword "
​​​​​​
Easier to rob a bank with a pen than with a sword (or a gun) :wink wink:

 

[JR4X]

I’ve worked in finance, budgeting, operating costs, project planning for a couple giant oilfield companies. The most successful one I worked for operated on cash. They built their business slow and carried very little debt. The fastest growing company I worked for built their business on revolving credit.

After being with both companies through both highs and lows I’d rather be the slow building cash operated companies. Fred J. Barrett retired in his 50’s with Hundreds of millions in his entire family’s bank accounts. The debt Operated companies that bought him out have all been bankrupt multiple times since taking over. As Evernoob pointed out the debt operated corps grew fast on paper but there was nothing there to lean on when the price of the commodity they self dropped by 75%. The payment is still always due even when the revenue stream went from a fire hose to a faucet drip.

That said, for me to start my own thing I’ll have to start and run on debt.

 

[Clemson13]

I don't think that the guy down at the Power Company who's saving for retirement is a dumb schmuck. Not everyone wants to be a tycoon.

Also, the book Millionaire Next Door says you're wrong. In fact, by numbers, more 'wealthy' people accumulate their money using some variation of 'pay cash' to do it. Unless you don't consider 7-8 figures 'real wealth'.

Youre correct. I dont consider that wealthy. 7 figure net worth is upper middle class these days. Low 7 figures is middle class for those at retirement age, its the expectation.

Leveraging debt CORRECTLY is the key. Why spend cash on something if it costs you more to do so than to use debt. That would just be stupid.