Should You Practice Financial Leveraging or Bootstrapping?

Should You Practice Financial Leveraging or Bootstrapping?

Sean: Would it be advisable to highly leverage your business? I think this is making your business a collateral. Would it still be considered good debt? I’ll go ahead first and answer this one.

With leveraging your business, not a lot of banks would allow your business to become leverage especially if you’re starting up. They won’t even lend you money. You have to be established for at least five years. Show them your ITR (Income Tax return). They know your bank account, so they know if you’re making money or not.

Before you’re able to secure a loan and it’s not going to be the loan amount you want. It’s going to be less than that. So it’s pretty tough even loaning money from the bank when you’re a startup. But if you have a big brand, for example, Ford. The logo of Ford, was actually turned into a collateral by Alan Mulally, who is the CEO of Ford, the one who turned it around. And he used that blue logo literally as a collateral, and so the bank loaned him money for that.

So that’s an example of using your business as leverage. But otherwise, if you don’t have a brand that powerful, I doubt you can use it as leverage. And would it be considered as a good debt? Good debt or bad debt, it will still depend on what you use the debt for, not on what your collateral was.

So even if you use your house as a collateral, but you use it as a collateral to buy a boat, for example. Strictly speaking, if it’s a boat that you’re going to use for personal reasons, it’s not an asset. A boat depreciates and saltwater corrodes it. So that’s a bad debt because you use your house as a collateral loan for a boat.

But if you’re going to use it to start building, then yeah, that’s a good debt. What’s your take on this, Erika?

Erika: Debt in general, I don’t know, I stay away from it because for me, it’s foreign. I don’t like to tackle it. So far, while growing the business, I didn’t loan anything. I just funded it with my own money. And from there, I only just kept on building. And yeah, like what you said, don’t use your house to loan for a boat.

Sean: Yeah, I mean, an example of a good debt for me would be if you’re going to buy or invest in another property that you can pay, of course, you have to make sure you can pay that debt.

So my house, I use it as collateral to secure a loan for a debt, and that’s for buying a property where I plan to build the future headquarters of SEO Hacker. It’s a 600 square meter lot, which is pretty big and it’s a significant amount and I can’t buy it cash outright. But I calculated it. We can actually pay it off in a good amount of years with a good interest.

And so that’s a good debt because that’s an investment and it’s an investment not to sell. I don’t plan to sell it and flip it, but to build the future of my business, my company. So that’s an example of a good debt.

And before I move to the next question, I do agree with you, Erika, when you said that you stay away from loans. I would say, that’s being a conservative businessperson, which that’s exactly the route I went.

So we use our own money. We call that bootstrapping. We use our own money to fund our business, to pay our expenses, and we rolled it in. We reinvested it in the business and grew it. I think that’s a really good way to learn and grow your business instead of going blitz and loaning money and growth, growth, growth.

And you’re not sure about your finances, where you’re bleeding, because you’re growing so fast, you don’t have processes in place, you’re churning people, you lose people, you hire people like you’re changing your clothes every day. So I don’t think that is a really good way to start it. 

Erika: I think if you know the system and how it really works and if it’s in your favor, yeah, go ahead. But like me, admittedly, I don’t want to go there right now.

Sean: Right, right. I think this is an interesting question. Her name is also Erika. How can I make my business more sustainable?

I also don’t know what your business is, but here’s what I can say. Business becomes sustainable when cash flow is good. When revenue is greater than expenses, then you have a stable business. As long as it’s that way, month on month, you have a stable business.

And what you need to do next when you have positive cash flow, month on month is to have a safety net. A safety net is six months or a year worth of savings matching your company’s gross revenue. So, for example, if you’re making one million per month, it should be six to twelve million. That’s your safety net. Don’t touch that money. That’s for a tough time. That’s for the pandemic or a crisis, you know. That’s your safety net. Then it gives more security and stability to your business.

For me, that would be the action steps, and we could go all the way. Like insuring your business, insuring yourself. We could go all the way. But I think good cash flow, good positive cash flow and a safety net, those two things are the most critical.

I’m 19 y/o, and I already started business in different fields. For me to improve, do you think I should find a niche or do I just simply find market gaps or try to compete in saturated markets? I’ll let you go first, Erika, since they’re too tired of me.

Erika: Hi Niño! Wow at 19 years old. What different fields? Is it okay to ask? What are your different fields? For me, the way I approach business is when people ask me what business I should pursue, usually what I tell them is: Where does your passion lie? And what’s your current situation? And then find where those two meet.

Like me, I like fashion and I want to work from home. So, the way for me was to go online. But this was from years ago, when e-commerce was not yet a trend here in the Philippines. For me, what do you want to do and what’s your current situation like?

Sean: Got it. Those are questions that you need to ask yourself, and sometimes you need to ask ourselves those questions to find the answers to some of our other questions, right?

Erika: True. And then, you’d have more questions. Never ending questions.

Sean: Yeah, that could also be the case, and that’s why we’re having this show. But yeah, it’s a tough one. But I think that going for a niche is the best way to start because you can dominate it. When you’re in a market that has too many competitors, it’s going to be a problem.

Because I’ve met very successful businessmen who wanted to enter an industry where it’s saturated with competition. They would just say that it’s not worth it. It’s not worth it because there’s a price war going on. People are dropping prices, profit margins disappear. It’s not sustainable.

But people who focus on a niche and dominate it, you’re able to build a brand for yourself. You have that demand for your brand, then you’re going to be building a much more stable business. So I think that’s the way to go if you ask me this question.