I am going out on a limb here, but I don’t like Dave Ramsey. That may be heresy to some, but let me explain why. Aside from the fact that he is dull to listen to, has not a funny bone in his body, and generally is preachy and dogmatic, that is not why I think Ramsey is bad for business. It’s not even that I disagree with his advice, although most of it tends to be more family therapy than financial help. In large part, his recommendations make a lot of sense for the right people, and that is what brings me to my trouble with him. His advice is geared towards wage earners, NOT small business owners. I’m sure there is a lot of crossover, meaning many small business owners have wage-earning spouses, and deal with many of the same issues. The shortcoming is, however, that Ramsey’s advice doesn’t go far enough. His advice is, “if you don’t have cash, don’t buy it.” Brilliant idea, but not very practical for most small business owners. Sure it is preferable to not have to borrow money, but does it really make good business sense?
Generally, I would say no, and except for a minuscule number of businesses in the world, is not done. So why is it okay to borrow money in a business and not personally? Well, let’s first look at what debt really is. Debt, along with any other source of capital (i.e. leases, silent partners, receivable factoring) is leverage. It is taking on a financial partner in which both parties have something to gain. This is not some predatory credit card company taking advantage of ill-informed consumers. It is an informed small business owner (if that doesn’t describe you, then skip to the last section of the article!) that needs cash, partnering with another individual or company that has cash, and would like to earn money on it. Nothing sinister or immoral about it, and really it is no more complicated than that. And I’ll go a step further to say that in principal, there is NO difference between a factoring company, a bank, and a silent financial partner. There are practical differences, but the essence of the transaction is all the same.
The Big Stick
With leverage, you are able to lift more. In principle it is no different than using a lever to lift a heavy object. Longer lever, easier to lift the boulder. And like in reality, leverage comes with additional risk; you have less control over the load. Things go backward just as easily as they did forwards. If there is a sin that small business owners do commit it is that they don’t understand their risk, and manage it. They approach debt like they do personally, which brings me back to Dave Ramsey. Ramsey does next to nothing in educating his followers in financial affairs. What you say? How is that so? He’s on the radio, writes columns and books, all about finance. In reality, most of Ramsey’s financial advice is no more complicated than, “Don’t spend more than you take in.” Did I really need someone to tell me that?
A Better Way
Rather than listen to Dave Ramsey, small business owners should spend more time finding people that have been there, and done that, if possible in their industry. They need to seek out financial experts, like CPA’s, that can give them expert advice. They need to read Rich Dad, Poor Dad by Robert Kiyosaki, rather than more of Dave Ramsey. The truth of the matter is that the reason Ramsey has to deal with people on such a basic level is that our economic education in general, is so poor. As Malcolm Forbes quoted so often from the Bible, “With all thy getting, get understanding.” Small business owners need to immerse themselves in learning about financial matters. I’m not suggesting that they study the income tax code, or go back to college for an accounting class. What I am suggesting is that they need to quit saying, “I don’t really need to understand that stuff. Someone else handles that for me.” Every time one does that, they aren’t managing their risk; they have no idea what their risk is!
The answer to the unasked question is, there is nothing wrong with borrowing money! As long as:
- You are using the money to purchase an asset,
- You know the risk,
- You are comfortable that the return is worth that risk, and
- You manage that risk to achieve that return.
Don’t let Ramsey scare you into not borrowing money. It’s bad business.
Next time I’ll discuss partners, as in Dave Ramsey doesn’t think you should have any. That is even worse advice than not borrowing money!
Tell me what you think. Do you agree with me or Ramsey?
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