Yeah, I got a loan to start my business. Not just one, either. Lots of them. Looking back it makes me wonder if having a good credit score is all it’s cracked up to be.
I’ve started the same business twice. The first time was in 1999, when I started Mindwire Interactive. “Investors” put in $41K, which I still intend to pay back someday, given that I don’t think those people realized what making an investment meant (i.e., you stand to lose it all and get nothing back). But other than that $41K we didn’t borrow a dime, except for me and the partner I brought on not paying ourselves for six months. In 2003 I sold Mindwire, walked out the door of the company I sold it to, and started MWI. The same business with a different name and different employees. But this time I was smarter, or so I thought. After all, I had two and a half years of experience. I knew the market. I knew what kind of employees I needed. I was in a better office, in a better market, with freeway signage. I had credit for magazine ads in a local business pub. Rather than starting during the dot com crash I was starting just as the economy was coming back to life. I had it all going for me. And I also was approved for a $100K SBA loan, which meant I had capital to do things the right way this time.
But then things didn’t quite work out as planned. $5K of bad luck here, $10K of stupid decisions there, another $15K of bad luck, another $25K in bad decisions, a general lack of revenue, and within a few months the $100K was gone, I had monthly expenses of $45K, and only $20K per month coming in the door. Perhaps a smart entrepreneur would have cut expenses, let people go, get the business profitable, retrenched, and then bootstrapped the thing. Not me. I knew what I was doing. I just hadn’t had enough time. So I got more loans. I used personal credit cards. I got loans on my cars. I did whatever I could to scrape money together to continue living my lifestyle. Not my personal lifestyle–me and my wife were living like paupers–I’m talking about my lifestyle at work. It cost a lot of money to have an office and employees. But I was being smart, you see. I knew it would just be a matter of time and the big jobs would come in, I’d pay off those no interest credit cards before they started charging me 30% interest, and then people would see how I was smart about things.
But once again, things didn’t work out as planned. Sure, we landed a big job here and there, but it was never enough to even catch up, let alone get back in the black. Was I unrealistic? Based on results, yes. Based on the information I had in front of me, no. Several other companies with similar business models started under similar circumstances and have gone on to become multi-million dollar companies. I could speculate about why sales weren’t what I thought they would be, but that’s not the point of this post. The point is that sometimes things don’t work out the way you planned, and if you got into debt to get to wherever you’re at, you might regret the debt and wished you had never taken it.
The first question I ask myself is “What would have happened if, in 2003, I had started without the debt?” Well, I would have done some things differently, that’s for sure. I would have worked out of a home office. I would have used contractors instead of full-time employees. I would only have grown in terms of employees and office space when I absolutely was forced to. I wouldn’t have had any other option. And in the process, I probably would have learned how to run my business better. The debt allowed me to make mistakes and avoid feeling the pain. It was like giving a high dose of morphine to somebody whose arm has been cut off. Sure, it makes them feel better, but it doesn’t help them solve the problem.
The problem for me was pretty simple. I was spending more money than I was bringing in, and frankly, I don’t think I needed the money in the first place. I think I could have accomplished everything I did in the last five years without it, and probably more. Because, you see, after the money from the loans ran out, I was pretty much back at square one anyway. But since that point, I not only had to bootstrap the business–I had to pay debt payments on top of that. So in reality I was worse off than if I had never taken any debt at all.
I don’t know if all debt is necessarily bad, and if we had gotten some lucky breaks and landed those big clients maybe I’d be singing a different tune, but from where I’m standing it sure seems like debt is a bad thing for people, businesses, and countries. Our government is in debt. Many American businesses are in debt. The American population is in debt up to their eyeballs. And the thing is, when you’re in debt, you make different choices than you would if you weren’t in debt, and those choices are seldom as good as the ones you would make if you were free of the debt. Often the best choices are taken away from you if you’re in debt. And so my advice to you, if you’re contemplating a startup, is to not get into debt. If you’re in debt, get out of debt, and stay out of debt. Get on a budget. Throw away your credit cards. Pay off that loan. Don’t spend it if you don’t have it.
I’m not out of the hole yet, but I’ve made a lot of progress this year. Sure, the total revenue is going to be down. It will be the first year since 1999 in which the business has brought in less revenue than the year before. But you know what? I’m learning that revenue doesn’t matter–profits matter. This year we’ve got positive net income, and I don’t think we’ve ever had that before. And that’s after paying myself this year, which I haven’t done since March of 2003. So in a superficial way, it seems like a step backwards because revenues are down, but in a very real way, it’s a huge leap forwards. Here’s to the basics. Spend less than you make. Stay out of debt. Keep it simple. Cheers.