We all run into roadblocks. Sometimes the difference between success and failure comes down to the ability to adapt, adjust and create leverage where none seems to exist. This starts with your attitude to roadblocks. "Normal" people see them as part of everyday existence. "Victims" think roadblocks are put up to stymie them. But the most successful view roadblocks merely as problems to be solved and look for things to leverage to that end -- sometimes seemingly out of thin air.
If you're put on a college waitlist, do you view that as a polite "no" or an invitation to launch a campaign? If your buyer raises objections to your sales pitch, do you view that as the beginning of the end or a request for more information? If someone turns down your job offer do you view that as the end of the conversation or just the beginning of the next round?
Get the point? Your attitude determines the reality.
Borro's Tom McDermott is in the business of helping people create leverage where none seems to exist. As McDermott explained to me, Borro offers small business owners, entrepreneurs and high-net worth clients loans from $5,000 to $2,000,000 against assets including fine art, antiques, luxury cars, luxury watches, diamond jewelry, gold, luxury handbags, fine wine other high value assets.
These guys seized the opportunity created by the credit crisis in 2009. As some of you may recall, banks backed out of small business loans almost completely. Small business owners had nowhere to turn. Fortunately, many of these business owners had been collecting things. So, when things got tough they an option they never knew they had.
Borro is doing 50% of its business with small businesses looking to amass inventory before holidays or dealing with changing in vendor payment terms or the like. It's doing 50% of its business with high net worth individuals dealing with tuition payments or unexpected tax payments. 90% of their customers pay back their loans and 65% repeat. Essentially, as McDermott puts it, they have "democratized a taboo".
To lever or not to lever?
Leverage is, of course, a two-edged sword. It amplifies your gains -- and your losses. It's romantic to talk about betting the ranch -- until you lose it. The simplistic answer is that each business should have the right level of leverage for its situation.
Those that have too much leverage do fantastically well when there is smooth sailing but get swamped by the smallest ripple. There's often a very fine line between leveraging other peoples' money and Ponzi schemes. We've all read too many stories about investors who took on debt, paid the equity owners large dividends and then declared bankruptcy when their cash flows weakened to the point where they couldn't service the debt.
On the other hand, those without leverage can't flex to take advantage of opportunities. Building businesses organically out of free cash flow is often painfully slow. Safe. But slow. Leverage comes out of debt or new equity. The question is whether you're better off owning 100% of a $1 million business or 10% of $100 million business.
The right level of leverage seems to be related to the balance of opportunity, risk and risk appetite. Some thrive on risk. Some need to be safe. Think about applying the "How stupid would you feel?" question. How stupid would you feel if you took on the leverage and things blew up? How stupid would you feel if you did not take on leverage and things worked as expected? This will help you gauge the magnitudes of opportunity, risk and appetite.
Temporary Leverage
Not all leverage is the same. The commitment to equity, debt and short-term debt is different. Some may choose to be relatively unlevered but lever up for short-term situations.
JD Power and Associates built its business with syndicated research. Instead of waiting for others to contract (and pay them) for research, they would do research themselves and then sell reports on things like consumer satisfaction with automobiles. They financed this with a revolving credit line, borrowing money to fund the research and then paying it back when they got paid.
Net, create leverage for the right opportunities, at the right time, in the right way -- for you.