Growing a Debt-Free Business

2011 | Jan 5 in Entrepreneurship , Business Development , Home Page News , Money

By E-Myth Business Coach,

savingsVenture capital, business loans, and lines of credit: all this and more exists for businesses that need to grow, to purchase equipment and inventory, or expand their facilities. Much of the initial growth for small businesses is funded on borrowed money. It’s the way things are done. But it comes at a cost.

In the last few years, however, many small businesses have begun to move away from acquiring business debt either by choice or — and this is something which is occurring more frequently — by circumstance. The tightening of credit, loss of access to capital, and the general skittishness among potential investors and lenders has made the prospect of boot-strapping a business a much more attractive option. Sometimes it is the only viable option.

But is running and growing a debt-free business practical? What are the downsides? And more importantly, what are the advantages of building a business without borrowed money?

Starting From Scratch Or Changing Course

Financing a new business without borrowed money is challenging and it takes time. This is probably the first reality an entrepreneur has to come to grips with if you choose this route: you have to start relatively small and be prepared to take a longer period of time to reach your goals.

Another downside is the potential for seeing competitors gain market-share and gross revenue much more quickly as they take on borrowed capital to fund their marketing and production efforts. While the tables may well be turned down the road, at the start, this can lead to discouragement and second thoughts about maintaining a debt-free strategy.

More traditional businesses that have incurred debt from borrowed capital have a different set of challenges when making the move to become debt-free. If the business owner is not already intimately familiar with the company’s finances, this is the first order of business. You will need to know where the money goes and the business’ real profitability, among other things. If the business is not using an operations budget, this too, will need to be developed and put into play. And it must be used as a strategic tool along with a comprehensive cash flow management plan. Diligence will be required as well as a total rethinking of “how we do business” if the company is going to decrease expenditures, increase cash flow and pay off the existing debt.

While business owners may find this to be an intimidating prospect, the evidence shows that during economic downturns the less debt a business holds, the greater the odds of that business surviving. And when the economy is looking brighter, the debt-free business is in the strongest position to take advantage of the opportunities.

It's Possible

A few years ago, an investment blogger noticed that among a relatively random selection of stocks from high-debt companies the average year-to-date return was -6.9%. An equally random selection of debt-free companies tallied up an average return of +18%. While this was not a scientific study by any means, it does serve to illustrate the fact that companies without debt can be (and often are) more profitable than those carrying a significant debt load.

One of my clients has operated from a no-debt perspective since going into business over ten years ago.  More recently, he began to diligently and consistently reinvest a portion of his monthly earnings into a “cash reserve” fund over a number of years with the goal of having at least a year’s worth of operating capital available. This fund served him well during the recent economic downturn when he needed to invest in added staff and equipment in order to take advantage of new opportunities that he would not have been capable of taking on at his previous size.

His competitors, on the other hand, were in the throes of downsizing and cost-cutting while still servicing the debt they had incurred during the previous “boom” years. As their overall profitability declined so had their flexibility – they were not in positions to compete for the opportunities that my client was able to secure for his own company.

Another tactic that has served him well is to maintain a “cash-only” policy with his customers. While he does provide for a one-half payment on acceptance of a project and the second half upon completion, this arrangement allows him to operate in the positive throughout the duration of his projects. And he can offer his clients a slightly lower fee since he does not have to finance receivables for 30 or 45 days like his competitors do.

The upside of all this is that business owners who are operating without business debt have a greater degree of financial freedom and flexibility, and a much lower degree of risk in the face of economic downturns and declines in business. And then there is the old proverb, “The borrower is the servant of the lender.”

Sacrificing the Fast Track for Slow Growth

For the majority of businesses that opt for a debt-free model, business growth tends to be slow. Jay Steinfeld, CEO of Blinds.com, the world’s largest online retailer of window coverings, made it a point to get – and stay – debt-free. “It’s been our goal to grow inch by inch, never spending beyond our means,” Steinfeld said. “We’ve done it all debt-free!”

While it is true that borrowing capital enables a business to take actions or grow at a pace that would not be sustainable otherwise, it also causes that business to be less flexible and incur higher risk. The more the business borrows, the more it spends towards debt payments and interest. Cash flow is impacted as well as net profit. Combine this with extending credit to customers, and it is possible to experience serious cash flow situations. It is a sobering reality that many companies have failed from lack of cash more than anything else.

Five Points to Consider

Becoming a debt-free business, or building one from the ground up, is a lengthy process. But there are some strategic points that must be embraced if you are to succeed:

  1. You need to know — intimately — the true cost of delivering your service or product.
  2. Become crystal clear as to where the money goes.
  3. Develop and use an operating budget as a decision making tool.
  4. Always know your financial condition and situation — know the numbers and operate your business with this knowledge in mind.
  5. Consistently measure revenue, gross profit, and cash.

While there are no guarantees in life, it is certain that as a small business owner you will sleep better at night knowing that your business is stronger and more secure in these uncertain times as a debt-free operation.


  1. .Nate E. says:

    Great article! I just started my own blog centered around this very topic! I am trying to build a community of like minded entrepreneurs who want to start their business debt free and help others do the same I would love to interview the business owner you mention in this post if they would be interested

    Submitted Jan 5, 2011 9:22 AM

  2. .Faheem M. says:

    Very informative article, especially the last five points to consider - thank you. To the previous poster Nate E. - pls point me to your blog, would love to read it. 

    Submitted Jan 5, 2011 9:54 AM

  3. .Jason C. says:

    Great article.

    I knew I wanted to open my own vintage clothing boutique for a few years. While it was very difficult and required a lot of discipline, I saved up the money for the build out of the store, fixtures and inventory and a substantial amount for operating costs "just in case". I knew I wanted to do this all out of pocket with no debt and I am glad I did.

    We have only been open for a few months now, but we are debt free and it does make it much easier. We have had a successful first few months (THANKFULLY) and have not had to dip into reserve funds. I think about this every day though.... would we be in the same situation if we had borrowed money. I don't know, but I do I know I would be more worried about the unknown.

    Anyway, thanks for the article. Great reading!

    Submitted Jan 5, 2011 10:15 AM

  4. .Kim S. says:

    I like the concept! 

    I own a retail store with a very high inventory value. I was speaking to my accountant about working towards a debt free business. I agree the risk would be much lower and sleeping at night a lot easier. I am very close to debt free personally and it feels great. When it comes to my business though, my accountant's only concern was, down the road when I want to sell the business the inventory is worth less when it's paid for verses when you finance it from a leverage stand point. The buyer would look at this as a weakness and offer less for the stock portion of the business purchase. Also, working towards making the business debt free, the business would no doubt have to pay higher income tax as you would be profiting higher instead of paying yourself a bonus for a good year, for example.

    Regardless of the potential shortcomings I plan to work towards the debt free aproach and found this article inspiring. Thanks!

    Submitted Jan 5, 2011 10:55 AM

  5. .Bill O. says:

    A friend of mine ran a business completely on a cash basis. He owed no one, and no one owed him. He ran that business successfully for 20 years like that, until he had a fire. He went to a bank for a loan to rebuild. He couldn't find a single bank that would talk to him. Maybe this is a story about having proper insurance. But I think it's important to consider that a business with no debt has no credit. I think, as with most things in life, the best plan is a balance. Have the cash and assets to support the debt you take on, tie the life of the debt to the life of the asset it was used to purchase, and never overextend. If you finance your cash flow, you need to pay it off in full every cycle. If you finance a vehicle that you're going to keep for 3 years, get a 3 year loan, not a 5 year loan. One successful strategy that has worked for us is to put 50% down on assets and finance 50%. That way, after your first payment, you own more than you owe.

    Submitted Jan 5, 2011 11:04 AM

  6. .Kimberly L. says:

    I have been running an online store debt free for nearly 2 years now.  Given the nature of my products, I want to open a brick & mortar retail store and am struggling to find ways to do this in a reasonable amount of time without debt.

    Submitted Jan 5, 2011 12:17 PM

  7. .Micah T. says:

    Fabulous article I will be sharing with others.

    One other interesting personal observation about debt in a business is the owners I know who run debt free spend less on salaries, furniture, space, etc. because they are keenly aware the cash is leaving their grasp.  The indebted owners I've met typically spend more on nice spaces, pretty furniture, super-duper computers, etc because they have the money to spend and it's all just a "monthly payment" anyway.  Of course profit minded owners recognize that both the interest paid and the more expensive purchases deprive the owners of profits!

    Submitted Jan 5, 2011 12:51 PM

  8. .Tom S. says:

    Great Article. 

    Running a debt free organization is key in our strategic objective and something I have never regretted.  Debt can be lever that give you the advantage or if your on wrong side of the fulcrum is can be what catapults you into bankruptcy.  A portion of the profits always go towards our cash reserve.  As our suppliers were struggling we were able to help them with fast cash and grab inventory for 60% off.

    Having the illusion of liquidity through debt hides the rocks under the water.  Once the liquidity dries up your left with hug obstacles that should have been seen and addressed in the good times.

    Tom Schwab

    Goodbye Crutches

    Submitted Jan 5, 2011 1:06 PM

  9. .William B. says:

    As a business owner I tend to agree with Bill O., credit is for when/if you need it and hopefully not because you have no other choice. It's true there is more risk with debt but using other people's money to finance your business can also reduce your own personal risk and the leverage can allow you to explore opportunities that might not be within reach otherwise. We have debt but we manage it very actively and make it work for us by building credit, and in that way it can be a powerful business tool. Unfortunately, it is credit (not cash) that makes the finance world go round.

    Submitted Jan 5, 2011 3:10 PM

  10. .Evgeny G. says:

    What about approaching this issue as a C corp. that can sell stock to raise funds? I'd like to learn more about that instead of using creditors. It seems to me creditors only lend to those who qualify so well, that they don't really need money.

    Whereas entrepreneurs can sell ideas and processes as well as products. Seems worth knowing something about, anyway.

    Submitted Jan 5, 2011 6:32 PM

  11. .Oscar o. says:

    Very insightful article. We have debt and i made a conscious decision in Dec 2010 to become Debt free.

    I believe the most practical way to do this is by developing a CASH RESERVE or savings from the business.

    Just completed my Audit and the Finance costs were though the roof.

    I like what Mr. Lee Kashing recommends if you have to borrow get the amount you want to borrow put it in an Interest bearing Instrument then borrow the equivalent amount, you repay the money while in the meantime you make Income on the Instrument.

    Hope that is helpful,

    Best regards,

    Submitted Jan 5, 2011 8:40 PM

  12. .Abdullahi M. says:

    Your article was really inspiring. Is very good thing to run a business debt free. But what I think is you need to balance the need to grow fast and be free of debt. If you limit your growth to what you are able to finance then your growth will be limited and may take you long to reach. I think as Bill O said the best is to balance. without over doing it. i see this days business who are so much leveraged that they carry 2 or even more times of their assets. the other side of the coin is it may take you 20 or 30 years if you say you will finance from your own cash flow. Unless you are in very niche business and have no competition and a lot of customers. 

    Submitted Jan 5, 2011 9:37 PM

  13. .Setyadi O. says:

    Bill O's (Point 5 above) is refreshing. Never thought that one ought to pay at least 50% so that everytime you pay the installment the properties are really "owned" by you.

    To combine both loan and own resources are also a good idea. In conclusion, one must not over-geared.

    Submitted Jan 5, 2011 10:19 PM

  14. .Victor Y. says:

    This article is so encouraging particlarly to me because I started my diary product business with this model in 2008. For the saying that says that the borrower in a slave to the lender, I choose rather not to be a slave. The testimony is that in one year my business experienced over 1000% growth completely debt free and is still growing. I am a proof of the efficacy of this business model. This article is a report on by business operation model.

    Submitted Jan 5, 2011 10:49 PM

  15. .Keith L. says:

    Excellent article and comments.

    Cash is King - there is no doubt about that.  My brother and I have financed our software company's growth entirely without debt with one exception.  We financed the purchase of an office condo about 10 years into the business as an asset of a second company we setup and lease it back to ourselves.  Now this asset becomes part of our retirement portfolio and will be paid off by the time we retire (or sooner).  I think one should consider real estate debt in a slightly different way because this asset appreciates and can generate revenue on its own.

    A question we often ask ourselves is how much cash reserves should we have on hand?  I have heard 1 year worth but for us I think that is excessive and is up for grabs should you ever get sued.  And 1 year worth of what?  What business all of a sudden losses 100% of its sales where the reserves would have to cover 100% of the expenses?  Also, if you were in a downturn, you would most likely reduce your expenses so that would extend the reserves beyond a year...and this year’s expenses are really not relevant - should you base it on the past years expenses plus maybe 10%?

    We currently carry 4 months reserves based on the average monthly expense of the last six month +10%.  If we dip below that, the owners don't get a bonus until the reserves get above 4 months again.

    Then, what do you do with the reserves?  Seems foolish to leave them in the bank earning a paltry 1/4 of a percent.  We keep 1/3 in stocks and mutual funds that we manage ourselves, and 2/3 in a mixture of operating cash and bond mutual funds that earn about 3.3%.

    We do use credit cards but religiously pay them off every month.  And we get paid for using them - all our cards are cash rebate cards which amounts to a couple thousand dollars per year in checks the credit card company writes to us as a nice little bonus.


    Submitted Jan 6, 2011 11:25 AM

  16. .E-Myth Business Coach says:

    I would concur with Bill O. that finding a strategic and effective balance can be a good choice. As our article points out, running a purely cash-based and debt-free business is challenging and often difficult. Expansion and growth is usually limited to the amount of cash the business can generate and sustain over time. And without a favorable debt history, access to credit is limited or non-existent. Therefore, it's vitally important to weigh out the costs and benefits of both approaches. 

    All of this points to the underlying truth that being strategic and intentional are key qualities to be employed for any successful business model.

    Submitted Jan 6, 2011 2:33 PM

  17. .shadrack i. says:

    I have never wanted to be a slave, and that is why i have operated debt free all along but it has taken me many years.

    Submitted Jan 10, 2011 8:40 PM

  18. .Adriane S. says:

    Great Article! Very informative and timely. As soon as I read your article, I completd my company's operating budget. I was in the middle of a tough decision and as soon as i completed the budget (the decision making tool), I was able to make an informed decision without any hesitants and it helped remove the emotions from the decision making process. Thank you for a timely article. The last five point are also helpful.

    Submitted Jan 11, 2011 1:41 AM

  19. .Priscilla A. says:

    This comes at a good moment for me.  Yes it sure is taking a while to build my business but taking loans never seemed like a good idea either.  So it's affirming to know dept-free is a viable way to go.  Thank you.

    Submitted Jan 16, 2011 5:47 PM

  20. .Matt K. says:

    This is a great article!  With todays global recession, having little to no debt is a huge advantage over your competition.

    Over the past several months, myself and 3 other business partners have been creating, researching, and discussing how to start a business debt free.  Check out our website: www.FOURwardThought.com.  We hope that someday, it can be a great sounding board for debt free companies.  We currently have 2-3 other businesses that we are starting debt free, in order to prove that debt free start-up can be done successfully.

    Submitted Feb 2, 2011 4:06 PM

  21. .Nicholas E. says:

    Fantastic article. So Wise, Thank you E-Myth World-wide and God bless you!

    Submitted Feb 4, 2011 4:41 AM

  22. .busayo o. says:

    Beautiful write up, Its a business model that gives you all the peace of mind especially when things go wrong. Its not bad to borrow when you are sure of the calculated risk. BUT what if it doesnt work according to the calculation?

    Submitted Feb 23, 2011 9:12 AM

  23. .Edward O. says:

    Putting yourself or your business in unnecessary debt just to build credit isn't a great idea. I used my personal credit once to pay for a business which flopped and I was stuck with not only a huge amount of debt, but also a horrid credit score. I worked diligently toward credit repair and after about a year my score got to acceptable again. So long story short... don't go into debt unless it's absolutely necessary!

    Submitted Mar 2, 2011 3:33 PM

  24. .suzi b. says:

    Hello,  i am suzi...........

    Fee-charging DMP companies will often charge up-front fees as an 'admin' charge, and then will charge an on-going management fee. This fee may be proportional to the monthly contribution, or proportional to the number of debts they are managing. OFT guidelines in the UK state that the debtor shall be made aware of all possible solutions to their circumstances. These solutions could include Re-mortgage, additional loan, Debt Management Plan, IVA (Consumer proposal in Canada), Protected Trust Deed (In Scotland), Full and Final Settlement, Bankruptcy and Debt Relief Order (In the UK)

    Each of these solutions has benefits and disadvantages. Some may incurr more costs to the debtor, some may cause more harm to the Debtors credit rating. While the stigma of Bankruptcy appears to be reduced these days, many Debtors still regard Bankruptcy as an unacceptable alternative. An Income Payment Order may also be imposed by the Trustee in Bankruptcy of up to 66% of the Debtors monthly disposable income.


    <a href=http://www.debtmanagementplan.co.uk>debt management plan</a>

    Submitted Mar 17, 2011 1:06 AM

  25. .Adam R. says:

    Great article. Nate E., would you guide me to your blog? I'd like to read and join.

    Submitted May 12, 2011 6:38 PM

  26. .Nancy W. says:

    Growing a debt-free business isn’t so easy these days. With merchant fees skyrocketing through the roof, it’s a wonder that any small business could turn a profit on any purchase made with a credit card for under two bucks. Credit card processing fees eat up so much profit that you HAVE to charge the customer a fee to prevent yourself from losing money! Many businesses simply hang up signs saying you can't use a card for a purchase under 10 dollars, but in California, law makers have just deemed that illegal! I surely hope the 12 cent processing fee cap passes through congress!


    Submitted Jun 27, 2011 2:28 PM

  27. .Greg B. says:

    I agree with you Nancy!

    Its all a debt trap to prevent small businesses from succeeding. Not only is it the merchant costs like

      <a href="http://www.switchcommerce.com/credit-card-processing">credit card processing services</a>

     but its all the red tape that's involved to the the taxes that bid companies are exempt from. People wonder why there's so much protest going on right now.

    Submitted Nov 28, 2011 2:04 PM

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