RICH Business Owners Use DEBT! Here's How!

Everyone, it's Mike Andes on the Home Service Millionaire podcast. And today we're talking to the seven figure business owner about debt. If you have a business that has 1 to 5 million dollars in annual revenue and you're in the home service industry, this video is for you to be able to understand how you can use debt. Is it something you should be using? Or should we be using the Dave Ramsey principles of never use debt, no matter what? So let's jump in. These are five topics on the docket from the producer. I have not read them yet, so we'll find out what we're going to be learning about today. When comes the debt games the owners play? Number one, are you really leveraging debt or just plugging the holes your operations keep drilling? Okay, so this idea of leverage, I think is important because if you think about leverage, I'll grab a pen here. Leverage is increased the further this center point, this fulcrum is moved off to this side. All right, so what that means is if I move this way over here, this is now a leveraged system. Because if I move this side of the pen just a little bit, it moves this a lot. And whereas if I put my finger, the fulcrum, in the center of the pen and move it just the same amount, it only moves a little bit. But if I put it over here and move it, it moves it a lot. That's leverage. And so I think the same thing when it comes to leverage in a business is I am able to make a bigger impact using the short amount of resources, the small amount of resources I have in terms of cash, if I leverage or use debt. Now, here's the thing. If I have a leverage system, think of it like a seesaw. And this is my fulcrum over here, way over here. And I move this like half an inch, and this goes way up, there's a lot of risk. Cause if something happens bad, if something shifts with my debt, whole system could come falling apart. And so when you increase leverage, you increase risk. You also increase, usually your return on investment because you're able to get more bang for your buck. Cause if I have a dollar of cash and I'm like, I'm only gonna use cash, great. You have a dollar's worth of buying power to be able to grow the business, invest in marketing, expansion, etc. If you take that $1 and you leverage it, you move the fulcrum over here. Now, that same $1 put on this side leads to a massive increase in the impact that it has on the organization. Because for that $1 you might get five or ten dollars worth of buying power. And so the question becomes, are you actually using leverage or are you using debt to plug the holes of your operations? In other words, an unprofitable business. And I think in my opinion this actually is, I have a pretty clear line on this. And that is if you're using debt to buy assets or you're using it to buy more customers via marketing, I'm a fan. If you use it responsibly, you can use debt to get greater leverage and grow the business faster. Because I personally do not want to take 15, 20 years to build a million dollar business. I don't want to take 10 years to go from a million to 2 million. Using debt allows me to accelerate that dramatically. And then by growth, if have a profitable business model and I'm able to accelerate growth, if I'm profitable, I should easily be able to pay for the debt and the interest and the payments on that debt using the extra profits from that growth. Now if you take a unprofitable business model and you add leverage, you are simply going to accelerate how fast you go out of business. And that's what a lot of people do is like the business model is broken. And so adding leverage is only risk. It only increases the speed at which you go into bankruptcy and lose money. Because a business that loses 5%, like we just, I was on a turnaround and they literally have a 5 to 10% negative profit margin. And the business owner is talking about going from 1.2 million to a $4 million business by starting another location in the state over. I'm like, whoa, whoa, whoa. Do you realize that you have 5% negative profit margin? Which means if you move in this new market, you're just simply going to lose $150,000 a year. And so the only way I want to use leverage is if I have a business model that works, that has profit. And then I poured the gasoline of leverage and debt on the business to be able to accelerate the speed at which I would grow the business. And the only reason I would accelerate the speed at which I would grow the business is because if I grow the business and it's profitable, the extra profits make up for and more the payments on the loan. And so if you have an unprofitable business and you're buying things that are not assets, I. E. I'm using it to buy uniforms for my team, I'm using it to improve my shop space, I'm buying mowers I'm buying excavators, I'm buying all these trucks and things. Like, if I'm buying things that are not getting used every single day and are not going to fuel the growth top line revenue of a profitable business model, I do not use debt. And so this is why many times in the first couple of years I encourage people like, focus on recurring revenue, focus on building the business model that is profitable. And then you might run a business that's 250,000 doll in annual revenue. You have like one employee, but it makes $80,000 in profit, $100,000 in profit. Great. You have a profitable business model that if you go apply debt to it now, you have the possibility of getting to a million in a matter of a couple years and be able to take the extra $150,000 in profit that you make from that additional $750,000 in revenue and easily pay off any debt and interest that is accrued from going into debt. And so be very careful about taking an unprofitable business model and using debt as working capital. All right, so if you're buying trucks, you're buying equipment, you're buying, quote, unquote, more customers via marketing. I'm a fan of debt, especially if you're using the assets every single day and their asset utilization is very high. I'm a fan if you're using it as working capital to get through the off season. Not allowed. And everyone will take the words I just said like, oh, I did buy trucks, I did buy equipment, but you don't have enough money to get through the off season. So realistically, you're actually getting the debt and all order to be able to plug the hole of an off season that loses money. And so if you're not going to have an off season that is profitable, you don't get debt because you don't have a profitable business model. And that is blunt, but I'm trying to be as prescriptive as possible. If the debt is going towards assets and buying more customers and you don't lose money during the off season, I give you the pass to go get debt. You will grow faster and the growth that you have will be able to pay for the extra loan payments and the fixed expenses. But if you're losing money during the off season, if you're basically using this capital to plug the holes of being able to have enough money to make it to the off season, don't use debt. You do not have a profitable business model. And that is why the off season Book, right, is the most important book I'll ever write for home services. And it is because that is the true issue with most home services. Because if you can't have a profitable off season, if you lose money during the off season, then any debt that you have essentially becomes a working capital loan. Getting a loan for working capital, very high interest rate. Why? Because banks know that if you're using money as a working capital loan, the chances of you making it through is much lower than if they have an asset that they can collateralize it with, that if you go out of business, they can go pick it up. And so if you're needing money as working capital loan, that's why the interest rates are so high. It's extremely high risk. And I do not recommend going into debt just to fund payroll. Like, you're like, oh, I got to make it. I understand you need a payroll, but let's go a little deeper and realize you don't have a profitable business model and you're losing money hand over fist during the off season. That's the real problem. And if you fix that, you could then not need working capital, but rather get debt towards a truck, a piece of equipment, hiring more people, getting more customers, and actually grow the business. So that was a little bit of my stump speech to get things started. Number two on the docket, why most equipment loans secretly cost you more than the equipment makes. This comes down to asset utilization. If you're not using a piece of equipment at least two or three days a week, just rent the thing. Especially. I've seen people over and over buy $10,000 core aerators, for example, that they use for 20 to 30 customers one or two days a year. I don't know why in the world you would buy that thing. Makes no sense logistically. Many times if you're not using that piece of equipment all of the time, like every week you're using the piece of equipment for something, you should probably just rent the thing. Especially if, Well, I got 100 core aerations. Great. Can you rent the thing for two or three days or a weekend and knock them all out? A whole lot better than getting a piece of equipment. And you're like, oh, no. Like I can make sense of it because the rental cost versus how much I'm spending on the debt, et cetera. Great. Okay, what about insurance? What about the fact that you have to store that thing not for the two or three or four days that you're using it, but for the entire year? This is why when you start Getting a seven figure business, all of a sudden your shop space cost goes through the roof. It's because you're storing a bunch of equipment you're not using. And so these are the hidden costs of equipment that no one takes into account. They take into account only the cost of the loan. When reality is insurance that goes through the roof. There's also storage costs and there's maintenance costs. Because now you got to maintain the thing after a year or two of things breaking and you got to get a mechanic or you got to take it to the mechanic. All of that is why I'm willing to pay. Like when I'm doing the calculation of rental versus buying and the buying, most people only take into account the loan, double that. So if you're going to pay $500 per month for that loan, make sure it's $1,000 costing you more than $1,000 to rent that piece of equipment. Otherwise, I would stick with renting my $0.02. Asset utilization is the thing that is going to be the key determining factor as to whether or not I use debt on that piece of equipment. If you have a lawn care business and you've considered joining Augusta Lawn Care and converting it into one of the franchise locations, go check out augustalawncareservices.com franchise where you can see all the numbers and what the performance is of all of our locations. Number three, expansion debt. Are you betting on growth or just kicking the profitability problem down the road? Look, we talked about already, you got to be profitable and then use debt as the leverage and the fuel on the fire. If you have no fire and you pour a bunch of gasoline on something, nothing happens. Nothing. It's very, very anticlimactic. All right? If I take a box of matches, I pour a whole bunch of gasoline on it. Nothing happens. But if I have a fire, if I have a profitable business and then I add the Gasol, that's when I can actually grow the business and so make a profitable business first. And you're like, well, I'm really profitable working by myself and we're 90% profit. You're not. You don't have a business model. You have a job, and that's okay. But you need to make sure you prove that the business model works and the business means delegating operations. Once you have delegated operations, you have employees that are doing the work and you're not producing labor revenue and you're profitable. That's when you have a business model that's profitable. As soon as you get out of the field and you're not producing revenue and the business still profitable. You have the flame, you have the spark. And I give permission to be able to pour fuel on the fire. Fourth on the docket, how rising interest rates expose sloppy operators faster than any competitor can. Okay, so when you raise interest rates, it really does force people to think twice about getting debt. Because when interest rates were 2,3% on all sorts of equipment and all the rest of it, it was very difficult to say no. That's also why you had massive amounts of inflation happening and people were raising prices like crazy because all of a sudden became very affordable to get debt. And so I'd be very careful whenever interest rates are really high.

There's many times if you look at kind of cyclicality of the market that is also a pretty good indicator if interest rates are really high, that you're going to be going into a season when there's going to be a little bit of a press down on demand. So if you look at 2020, 2021, everyone's booming economy, interest rates down at zero, all of a sudden, interests start going back up in 22, 23, warning it's going to get a little dicey. The reason they have to jack up interest rate is used to quote like push down inflation, in other words, push down growth. And they're trying to do that for the whole economy. But it's going to happen to your business if they push down growth, if they reduce the money supply, if they increase interest rates, in other words, reduce the amount of people that are willing to spend on home equity, lines of credit, on adjustments to their house, improvements to their house. If the housing market as it has the past few years, stabilizes and isn't growing by 5, 10, 15% a year like it was in 2020, 21. People spend money and so higher interest rates are usually a pretty good indicator that there's going to be a slowdown of growth because people are going to start spending less. And so when you go into a higher interest rate economy, I am thinking immediately, be careful, don't over leverage. Especially if you have fixed rates at high interest rates going into a downturn of an economy. So typically, if you're having a higher interest rate environment, I am much more cautious to get debt. That goes without saying because, well, yes, the interest rates are higher. Duh, you should think about more. I get it. But I'm even thinking about it more because usually when you have high interest rates, the government is on purpose trying to tamper down inflation, tamper down growth, which is going to lead to less borrowing from homeowners. And when the homeowner stops borrowing is when they stop doing home improvement projects. And so that's why in 2020, 2021, when interest rates are really low, people borrow. When the. When the real estate market is going up and up and up and just constantly going crazy. Like, I bought stuff in 2020 apartments and two years later sold for like 25% more. That's crazy. That does not happen in real estate. When that happened, we all experienced massive amounts of inflow of leads because it was easy to get money. Interest rates were low, and real estate was going very, very fast. High, like going up. The value valuations are so high. So people were able to get HELOCs because they had all this equity now in their house. And he locked the loan that they were getting on that. That home equity line of credit was very, very cheap because interest rates were low. The exact opposite has happened now, which is high interest rates. So the cost of debt is very high. And if you bought a house two or three years ago, in some markets, you actually are down. You're like, the equity has gone down. You're not. You do not have the flexibility to go out and even get a home equity line of credit. And so that pressure on the consumer trickles down to us as business owners because there's less demand. It. So if you're buying and getting debt during a time where there's high interest rates, I would just be careful because your interest payments are more. Yes, duh. But also, many times you're going into a time where there's more pressure on the economy and more pressure on the wallet of the consumer. So it's a double whammy, something to be careful of.