4 Ways to Use Debt to Grow Your Home Service Business

Hey everyone, this is Mike Andes and you're listening to the Business Boot Camp podcast. Today we're going to be talking about how you should use debt and when you should use debt and how you can avoid the pitfalls of the downfalls of debt and make sure it's used to your advantage to grow your business. Before we get into today's show, a big thank you. Today's sponsor, which is Gusto, if you haven't Already, go to gusto.combootcamp for a free 90 day trial of their software that you can use to allocate funds for different things of the employee's benefits. So if they want healthcare or if you're wanting to give them childcare or bonuses or just their regular paycheck, all being done through ach, all being done through automatic deposit. Very, very simple, Very, very easy, much cheaper than having an accountant do it, and a whole lot better customer service than QuickBooks in my opinion. So check it out Today, go to gusto.combootcamp I have yet to have anyone come back to me and say it was not better than their previous payroll service. So check it out today and I hope you enjoy that. Today we're going to be talking about when to use debt. But before we talk about that, I need to say a quick sorry for my stuffed up nose and sinuses and all that stuff. Kind of like feel like I'm. I can't talk through my nose at all. And the reason for that is because I have allergies to grass and the pollen and all that stuff, which is kind of funny because I'm in the lawn care landscaping industry. And so this time of year, the past couple weeks have been kind of brutal and that's why I haven't been uploading a whole lot. But just so sorry about that. But I do want to talk about today. Kind of go a little more deeper in the weeds of things and give some tactical advice about when you should use debt. This was stemmed by a question from a listener that emailed me about debt and whether or not he and his business should use debt in their scenario. So I just quickly jotted down four different areas that I've used debt and would encourage someone when to use the debt. And I was always pretty risk adverse when it came to debt. I'm not risk adverse by any means in terms of like using all the money that I do have and really trying to scale quickly and things like that. However, I've always been pretty debt adverse. I don't like debt, I don't like the idea of going to sleep at night with debt. However, I've seen successful individuals use it for different ways in different areas. And so I started to kind of figure out when I would want to use debt and then when I would, you know, rather just completely go cash. And so full disclosure, you know, Augusta Lawn Care Services, my landscaping company, is almost debt free outside of some equipment which is super small. And then Anytime Fitness, we purchase that with an SBA loan, so we have debt there. But all in all, I don't use debt a whole lot. Basically everything outside of Anytime Fitnesses SBA loan, really have not used debt a whole lot. In terms of long term debt, I'm gonna talk about different areas that I have used debt in ways short term, different ways that we have used it in the past. And maybe some ideas for you if you're considering buying a business or expanding or purchasing more equipment, real estate, whatever it is. I'm gonna kind of give some reasons why you would want to use debt and how you can use it to actually make your business better. And one thing about debt is you really, it comes down to a personal decision. I don't ever push someone to getting a loan and expanding their business if they're not comfortable with it. You have to really ask yourself, what level of risk do you want to take? And what are you comfortable? What level of risk are you comfortable with if it's gonna keep you up at night, don't take a loan if it's gonna keep you from operating. And.

My kind of rule of thumb is, if I can't sleep over it, it's not a good thing. And so that comes for me as a lot of different areas in life. But when it comes to debt and it comes to the level of risk that you have in your business, it really is a personal decision that you have to make to realize that, hey, debt might get you to a place faster, it might accelerate your business, but it is coming at a certain cost of risk. And whether or not you have the stomach for that is really a personal decision. Doesn't mean you are an entrepreneur, you are not an entrepreneur. Doesn't have anything to do with that. It can come down to just your personal circumstances. If you have a family, if you have obligations, if you have other past debt, student loans, things like that. And so I think it's a very personal decision. And, and the reason I wanted to make today's episode is because after this question that came in, I was reminded of when I was very risk adverse when it came to Debt and never wanted to have anything to do with debt when it came to my business and what areas, I sort of used debt to make sure it was so low risk, but definitely an accelerant for the business. So hopefully this helps. Today, this is probably geared more towards someone that is not wanting to ever take debt because they saw it really hurt their family. Or perhaps you went bankrupt personally in 2007, 2008, maybe you lost a house. Maybe that was kind of something you had to overcome and so you don't ever want to touch it again. But when it comes to your business, there are certain areas that you can really help and really help you to get to the next level. So I want to talk about a few of those things. This is not an exhaustive list. I'm sure if I sat down for 20 minutes more, I could figure out 10 more other reasons why you'd want to take debt on. But these are kind of the popped in my mind right away and when I responded back to the listener to help him kind of get through in his mind when he should use debt and when he should not. So the first reason why you'd want to use debt is for leverage. And so when we talk about leverage, I sort of think of it as a teeter totter. And on a teeter totter, if you're watching the video, you can see what I'm doing right now with my pen. It's like a teeter totter, where this is what's called the fulcrum. And so the more. The closer you are to either side, the more leverage you're gonna have. So, for example, if the fulcrum is way over here to your right, and now you have a lot of leverage because this hand here, if it moves, there's a tiny little bit the other side of the pen. The left side of the pen moves a whole lot. Okay, now, if the fulcrum is way over here in this scenario, this might be a company that doesn't have any debt. There's a whole lot of action now happening on my right here. But on this side of the pen, there's really not much movement going on. Maybe half an inch, but then I'm having to move a whole lot. Whereas over here, when I actually use debt, and the fulcrum moves over closer to the right. Now all of a sudden, I'm moving this hand by just a half inch or so, and this side is moving 3, 4 inches. And so I really look at debt as moving the fulcrum closer to me. Okay, so I look at debt as the fulcrum that moves the fulcrum closer to me so that as I move, as I make actions in the marketplace, my actions are amplified and make a bigger difference. So that's how I kind of think about debt and leverage. So when someone says I'm leveraged, that's sort of how I think about it. It's like, okay, I'm taking risk. I'm allowing the fulcrum that a fulcrum of debt to get closer to me, which is risky because you never want it to touch yourself. You never want to get hit by the fulcrum. But the closer it gets to you, the more leverage you have and the more effect your actions are going to take on your business and on the marketplace. So when I think about leverage, I also think about speed. When you're leveraged, you can move faster because you have more action. Again, back to the example. As you get more debt, the fulcrum of debt gets closer to you, and you make actions in the marketplace that are larger. Because of that, you also gain speed and velocity. So what I mean by that is when you're leveraged, you can use that money to buy ad space. You can use it for expansion. So really, you can use debt to buy ad space, or you can use it to get equipment or, or buy real estate or whatever it is that is going to allow you to expand and thereby make the actions you are doing in your business of greater effect on the market. So if you're not watching this video right now, if you're just listening to the podcast, I'm making a demonstration with my pen to demonstrate a fulcrum and what it does, how I think of it in terms of debt. So when it comes to speed in your business, if you want to grow your business super fast, a lot of times people will leverage themselves. They'll use loans, they'll use debt in order to make the speed of their growth faster. And one of the things that I look at in terms of gauging my personal level of risk tolerance towards debt when it comes to leverage is the interest that I'm going to be paying on that debt, will it be less than or equal to the amount of profits that I'm going to get from that expansion from those ads. So, for example, if I'm going to spend $100,000, let's say 5, let's take it back for a small business, let's say I'm going to take $5,000 and I'm going to spend it on advertisement And I'm going to take a loan out. Let's just say in this example I'm going to take a loan out of $5,000 and I'm going to go deploy that against advertisements. Now let's say that Those advertisements of $5,000 generate $10,000 worth of business. All right? So which is, by the way, is not a great, traditionally not a very good conversion, but let's say I spend $5000 on advertisements and I generate $10,000 in new business. Now if my profit margin is 50%, I basically break even. So if I make $5000, if I take $5000 loan and I then deploy that into the marketplace against advertisements and I get $10,000 in new work back.

Assume I have a 50% profit margin, I'm going to make $5,000, okay? I basically broke even. However, there's an interest rate that is attached to that $5,000 loan. Let's assume now that it is $1,000 of interest. So I end up having to pay $6,000 back to the bank. I received $10,000 back in terms of nets of sales And I generated $5,000 worth of profit. And so e thousand dollars on that deal. So what I am looking for when I'm looking at a loan and expansion in advertisements or whatever is what is the profit I'm going to receive from this expansion. So if I'm going to spend $5,000, I need to make at least $12,000 in order to break even because there's going to be $1,000 worth of interest paid out. Now if you're doing a long term loan, for example, like an SBA loan, like I did it for Anytime Fitness when I bought a, the first club here, it was basically like this. I bought the business and I was like, look, it's profitable. Will that profit. And we'll get into this in a little bit. But like will that profit cover the interest of that loan? So when it comes to leverage and speed, and if you're gonna go buy ads, you're gonna buy a piece of real estate to grow your business, or you're gonna buy a piece of equipment that you feel is gonna generate more income, the question is will the interest or sorry, will the profit from that expansion, will the profit from that new piece of equipment, will the profit, not the gross revenue, but the profit of that new business be greater than the interest you have to pay for the loan? Alright, so that's kind of an easy calculation. You want to think about in terms of leverage and speed and using Debt. The second reason I would use debt is for short term financing and short term order funding. So if you have pos, like if you're in purchase orders and you're doing things in the manufacturing realm where you're generating products, this is something you really want to think about is creating like a line of credit or having a loan, having debt to fund purchase orders that are short term. So you might need two or three months because you purchase raw materials and you need a loan to purchase a bunch of raw materials. But you know that two months later you have a purchase order on hand that you're going to then take those raw materials, manufacture your product and sell it within 30 or 60 days to a supplier, your vendor or your customer. And you're going to make a big profit margin or you're going to make profit of some sort and thereby the loan is justified because it's short term. So this is something I really encourage all small business owners to do is to create a good relationship with your local bank so that you can get a credit, a line of credit. This is something I had not even thought about because we did not use debt for the lawn. We still don't have debt at Augusta Lawn Care. And so I didn't use debt there for a long time. A few years ago I started thinking more about longevity and taking out risks and thinking about like possible things that could go wrong. And so we create a line of credit. Now how we use that line of credit? Yeah, one time to keep it active. We have never used it because we needed it. But when it comes to lines of credit and when it comes to short term financing, when you need the income or sorry, when you need the money, when you need the capital, when you need the debt, when you really need it, that's when the bank doesn't want to give it to you. When you're strapped on cash, you don't have a lot of money in the bank, things are not looking good for you. That's when they don't want to give you a line of credit. So if you're today sitting on a bunch of cash and you're doing really good and your business is thriving and you're kind of growing and things have been good, that's the time you want to apply for a line of credit, get the line of credit. Basically a line of credit says the bank gives you a thing and says, hey look, you can borrow up to $100,000 for us. You know, if you can get an unsecured line of credit, that's great. If not a secure line of credit, basically there's collateral behind it, like your equipment and trucks and whatever you have. And so whatever it is, you get a line of credit, the bank says, hey, for whatever reason, you can borrow 50 or 100,000 or whatever your line of credit number is. And so that gives you a safety net that gives you something to fall back on in times when something bad happens. It also allows you to use this short term order funding so that when you have a $50,000 purchase order in hand and you need $20,000 worth of raw materials, you can just dip into your credit line of credit, use the 20,000, produce the goods, make the $50,000, generate a profit and pay off the line of credit, and use it as a revolving line of credit that you pay interest on that you don't have to do a bunch of paperwork. You can take money in and out as needed and you pay interest on what you actually used it for. So I really encourage all small business owners to do this. Get to know a small credit union in your local market, get to know a banker, develop the relationship. And what we do is every single year I go back and I try to increase our line of, of credit. So as our financials get better, as our size of our business gets bigger, as we get more and more collateral and equipment and things that we can put on and secure that line of credit with, I want to increase that line of credit as much as possible. So every single year we increase it. Do we use it? No. But we make sure that it's increased and growing and is always there as a safety net. And if the opportunity ever arises where we need it quickly for a short term of time to jump on an opportunity, we can use it and it's there for the taking. Again, when you need a line of credit, a bank will not give you one. When you don't need a line of credit, that's when they're willing to give you one. So if you don't need one right now, that's when you should go get one and make sure it's set up already. Okay? And when I say short term, I'm talking like 12 months or less. I used to. Let me think. So I used the one time we used it for Augusta Lawn Care. The line of credit was when I did an acquisition of a small little landscaping company and we needed to use the line of credit to keep it active because it had been sat there, I think, for 24 months. And so we activated it. And by just buying this little company. And so again, less than 12 months, I think we paid off within like two or three months. And we didn't really even need to use it. We had the cash, but we, we activated it. But it goes back to the example of being able to jump on an opportunity. Short term financing for POS or for opportunities is what debt can be used for. The third reason why you want to use debt is for seasonality or cash flow. So if your cash flow goes up and down throughout the season, maybe a lot of your sales happen in December or November. December, like around the holidays. Maybe a lot of your sales happen around summertime when people are doing tourist type activities and off school and whatever. Like they do more shopping at your place, whatever. Maybe it's around a certain season or around a certain holiday or whatever it is. If you have a seasonality aspect of your business and cash flow goes up and down. Debt, that is many times a credit line is what you want to use to, to make sure that those curves and those ups and downs in cash flow are evened out somewhat so that during the lows you can use a credit line and then when there's lots of money coming in, you can pay that back and use it as a way to kind of balance out your cash flow. That is not the ideal situation. There's lots of other ways you can diversify. You can bring other services, you can get creative about selling your product in different times of the year. So for like landscapers, you know, we can figure out ways to generate revenue during the winter. There's ways we can make sure that we, from a cash flow perspective, sell 12 month packages instead of having to depend on debt to keep us throughout the winter. But nonetheless, cash flow and seasonality is a reason why you could use debt to make sure that you don't dry up during the times when sales are lower or your net profit margins are lower or whatever it is. But again, going back, the one thing that you might want to just take away and do today from this podcast is go get a line of credit, you know, pay the 1% origination fees, just get it in your hands and grow it every year. Every year after we get our tax returns, I go back to my banker and say, look, here's our financials. We did great. There's lots of money in the bank. We want a line of credit extension and we pay the 1% origination fees and we just keep trying to grow that line of credit. Why? Because one day I might want to buy a whole nother business and I'll just be able to use the line of credit. I'll be closed the next day. I'll be, let's say 10, 20% on the asking price simply because I have cash ready to go to the bank and just pick up from the line of credit. It could be equipment acquisition. There's a piece of equipment that is 50% off at an auction. I don't have that money in the bank, but I have it in my line of credit. It's there and I can be able to save 50%. I'm able to save hundreds of thousands of dollars on a piece of equipment. And simply because I had this line of credit ready for the taking, and I'm able to pay it off over the course of six months, pay a couple thousand dollars in interest, but say 50% because I had the cash on hand in the form of a line of credit. So I really encourage you, number two, short term funding and short term financing. Second thing is, Sorry, the third thing was cash flow seasonality. Both of those things have ties back to line of credit. And I really encourage you, if you're in a good place right now, if you have some money coming in, even if you're just making it along, just go get a $10,000 line of credit, get a $15,000 line of credit. It's not hard. Banks want to give these things out, especially if you have assets to secure the line of credit, like equipment, trucks, real estate, houses, et cetera. But it's a great thing to have. The fourth reason why you'd want to use debt, and I already touched on this, is acquisition. So you're wanting to buy another business, and whether it be a competitor or just a whole brand new business altogether. And one of the things I'm looking for is cash flow positive. Kind of three things I look for cash flow positive, as is with debt burden. So what I mean by that is, is it cash flow positive as is, like, without touching anything, without me being like, oh, I can improve this. This is what so many people do when they go and acquire businesses like, oh, I can make this better, I can make this better and then that makes the numbers work. Or like, if I can improve, you know, sales by 10%, then I could easily make this deal work. Well, no, that's not how I look at it. If I'm gonna go buy a business that's set up and is already successful and turnkey, as everyone likes to say, I look at the numbers and I say, okay, is it cash flow positive? Number one, as is, like without me changing it. Number two, like, does it make money today? And with the debt burden? Number three, with the debt burden, with the interest I have to pay, with the mortgage I have to pay on this debt, with my monthly payment, is it still going to be cash flow positive? So when I wanted to buy Anytime Fitness, that was the number one thing I looked at. It's like, okay, look, I want to buy this place. I know I can make it better. I've seen what it used to be. I used to work there a long time ago. I know what it could be become.

All of that is fine and good, but is it cash flow positive check as is. Is it cash flow positive without me changing anything and making it better and improving it and changing the staff and the advertising check? Yes, it was. Is it cash flow positive as is? With the debt burden that I had to now get with the SBA loan, several thousand dollars every single month, would it be able to be cash flow positive with that as is? And the answer was like, yes, it would be, you make a little bit of money be better than break even. So for me, that was like, okay, that's de risking me big time. Because I know if the trajectory of the business does not change and I don't improve anything, I don't improve the systems or the procedure or the people or anything, it'll still be able to pay the debt burden of the loan because it's a good business. And so for that type of a business, you're gonna pay a premium. You're not gonna be able to go out and go to a failing business and expect that as is, they're going to be cash flow positive. And even if you add the debt burden of a loan for that business, that they're gonna still be cash flow positive. So if you're looking for a good business, one that you're just going to improve on, that doesn't need. It doesn't need a complete overhaul, then this sort of formula works, and it's very low risk. But that being said, if it's low risk, you're gonna be paying more for it. So I paid a premium for this gym because it was cash flow positive, as is with the debt burden that I had to take on for acquiring the business. And so if you're wanting to sell your business, this is also something to be thinking about, is like, okay, does it make enough net profit to actually cover the debt burden that my asking price is going to afflict on someone else? That's a big question to ask. And so that's what I did when I bought Anytime Fitness. We've improved sales there by over 20% in the past year. Brought them up by over 20%. And so it's been, you know, that 20% is all gravy, that's all profit. But when I bought the business, when I acquired the business and looked to take on debt, that's when I look at the acquisition cost, I look at the debt burden and I say, if I put the debt burden on the existing P and L, would it still be positive? And so in that case of acquisition, I really favorably look at that. Especially if the cash flows are trending upward or at least stable, then you really have confidence that having that debt burden is not going to be too much for the business. And you know that if there are improvements and there are efficiencies and there are profits that are hiding, that you can kind of extract from that business, that's all gonna be gravy, that's all gonna be profit. That's all gonna be really good, positive on top of the fact that it covers the debt burden. So those are kind of the four ways I look at it. Number one is for leverage and speed. Remember this example, leverage and speed. Where are you in the Fulcrum? If you have a bunch of debt, you have a lot of risk. The closer this fulcrum gets to you, the more risky things are that something will fall over on you like that. But it also allows you to have, when you make actions in your business, small actions, that makes a bigger impact in the marketplace. That means if you have debt and you're using it to acquire customers and have advertisements, you're gonna be able to make a bigger impact out in the market. That being said, it might not be what you want. You might not be able to handle the risk of this thing toppling back over on you. And you might want to move the fulcrum out a little further away from you. You might not have as much leverage, you might not have as much speed, but you're going to be able to expand in your marketplace a lot faster using debt. Okay? And I'm no way condoning that you should get debt. I'm trying to convince the people that are so hell bent against it, but if they used it at certain specific times, they could really expand, make their, you know, expand in the areas they like more in terms of services or demographics, or hiring more people, or buying another business that has nothing to do with their current industry. And so leverage and speed is number one. Number two is for short Term financing and funding purchase orders. This could be for also from a contractor standpoint of view, it could be the financing you need to.

Acquire the materials to make a massive job. So for example, if you have a $2 million job that's coming up and you need $300,000 worth of material cost to get that job started, you might fund the $300,000 because you know the 2 million dollar job is going to net you out 600,000 do in net profit. And so you'll, it's okay to get that short term financing. All right. And number three, cash flow and seasonality. This is a big reason why you'd want to take on debt and why you'd want to use it for short term reasons. And in that scenario, a line of credit is super, super. It can be your best friend like a banker. People always have these negative things about bankers, but bankers really can be your best friends if you generate that relationship. Like I haven't played golf in three or four years. I used to play every single day when I was younger and I was like a, basically a scratch golfer, like one or two handicap. But now I haven't played for like three or four years. I'm going to be playing golf in two weeks with basically the reason is because I want to play golf with my banker because that's the level of relationship I want to keep with them. My business banker is like, hey, I want to stay in touch with this person. I want to be on their good side. I wanted to know the people they know. And I want like I want a friendship there to develop so that when I need them, they're willing to back me up even when regulations or when most people would say no. And so getting to your banker is important. Getting that credit line of credit established early is important. Establishing that trust with a credit union is important. I really like small credit unions over the big banks and they're much more lenient. They're much more geared towards small businesses that don't have a big track record. So get started with one of them and build that line of credit for either a rainy day or for the time you need cash to jump on an opportunity, whether it be an expansion or acquisition or whatever it is. Last thing is for using debt is for acquisition. And my big theory is can is it cash flow positive as is with the debt burden is kind of my test for whether or not I have.

The guts. I have the stomach for that risk of taking on that debt. Okay. So I hope that helps. Last thing I want to share I've been sharing this on landscapebusinesscourse.com quite a bit on the podcast. But as most of you know, I am franchising my business, Augusta Lawn Care Services. So if you're willing to start a business of any sort of we are going to be franchising in August of September this year and then you'd be able to start your landscaping business next spring, like February, March, but over the winter you could come get training, all of that sort of thing. So we're still getting set up right now, but come August, September, we're going to be accepting the first 10 franchisees. We have a bunch of people that have already registered right now we are not selling any. We cannot sell them right now. In a couple months we can. But if you're interested in getting more information, just go to Augusta. You can right here A U G U s t a augustalawncareservices.com franchise if you go there, it's just a simple form. Fill it out, just your name.

A couple little form like things you got to fill out. All that is like a contact form. And then in August or September you'll hear back from us. We're not going to like spam you or send you a bunch of information or try to sell you like that's not how it's going to work. In August or September we're going to contact you and invite you to a webinar. And on that webinar we'll share very in depth details of what the franchise is going to be. So if you're interested, check that URL out. Augustalawncare services.com franchise the franchise is going to be built for somebody that wants to start from home. You can start the business for less than $50,000 in your bank account. So if that's something you have and you're ready to go, in fact it's like 38,000 something, a bare minimum. So it's like 38,000 to 68,000 I think is how much cash you have to have on hand. So if that's of interest to you, if you want to grow a business that has systems, procedures and you can slowly scale profitably and has all the systems we built at Augusta Lawn Care, you might want to check that out. It's something that you can get more information on. We're not selling them right now. I'm not going to be calling you trying to spam you. But if it's something of interest to you and you want to grow a business, if you just come out of college and you got student debt and like the nine to five things not working out for you, but you have a little bit of money kind of left over that you could invest to get started. It's going to be one of those systems that you can start from home. You don't need a bunch of infrastructure, you don't need a lease, you don't need a ton of equipment. Very, very simple to get started. We give you the website, the tools, the marketing, all the back end support. So definitely check it out. Go to GustolonCare Services.com franchise and we really do want to change the industry. We're looking forward to that. So thank you everyone for listening to Business Boot Camp podcast. My name is Mike Andes. Until next time. Be great, because nothing else pays.