How Far in Debt Should Your Business Go?

05/26/2015 01:17 pm ET | Updated May 23, 2016


Broke. Kaput. Dead. Finished. That is what it feels like when your small business runs out of cash. I would tell you to avoid that from happening, but that's just stupidly obvious. The problem is that if you start a company, it likely will.

The painful fact is that eight out of 10 small businesses fail within the first 18 months. You know it is true because you see it happen all the time. If you are adventurous at heart and driven to entrepreneurship, it does not matter -- you must start a company.

Despite the low odds for success, you forge ahead to pursue your dreams. You are the business and the business becomes you, so it hurts badly if it fails. But being left with massive debt as a constant reminder is excruciating.

Great optimism often leads entrepreneurs to get going in the first place and take on debt to fund their business. Because they have no idea how much they need, they borrow as much as they can. But that is not always a wise decision.

So, how far in debt should your business go? How much should you borrow? I think the answer is simple. Only as far as you can afford to lose.

Considering that most businesses fail, how do you limit your losses if things go south?

100 customers say "Yes"
Go out and find customers who will get your business going. Now, while you would love to get paid before you start, that may not be possible in every industry. You can, however, tell people your story and explain how your idea will help them. You can ask for a pre-pay or find out whether they would commit to paying when you deliver. Having this validation will help you have confidence that you are really onto something.

First one focus, second one free
Focus every day on what will create the most value for your business. That will help you decide where to put your energy and money. Very likely, there are a few key decisions and actions that you need to make every day that will move your business forward. Do those first, and the second and third value-creators will follow.

Be stingy
I am not saying that you should be cheap, but please consider every dollar that you spend. This may mean putting off hiring or purchases that are not critical to your success right now, even though it might be something you really want. Only spend money when there is no other way around it. Break yourself and your employees with effort, and only expand when you are hurting the business more by avoiding growth than embracing it.

As a guy who has founded and been fortunate enough to build a few successful companies, I know that people do not start businesses to lose money. We start businesses to have an impact, work with great people, and leave a legacy. But I also know that businesses typically go down in flames.

My hope is that you will create a billion-dollar company. I also hope that if you have the spirit to start a company and it does not work out, that you are left debt-free.

Every business venture carries some element of risk. However, a failed startup should never break or "broke" you.

How much debt do you think an emerging business should take?