If you follow the 100 percent-leveraged philosophy, you’ll being the strongest of all positions. You can sit back and objectively assess the performance of the business.
It’s difficult for laypeople to understand but the more debt your business has, the more patient creditors will be with you. The reason is simple. If your business fails, creditors stand to see little or nothing. A business with a high liquidation value in relation to secured debt will yield a healthy dividend to creditors and make you a more vulnerable bankruptcy target.
If it’s going well but needs periodic cash infusions, you have your cash reserves to handle it. But now you’re making the investment decision based on performance and not projections. It’s far safer. Di ba?
BUT the bigger question is, how will financial backers, like the banks for example, take to the notion of 100 percent financing while you drive and manage the business without putting your own money! Is that insane? But I am telling you it depends on the backer or financier and your reasons. When lenders are convinced the reason is that you don’t have the cash to invest, you retain credibility, but your backers will take an even more skeptical look at the validity of your business plan. Let me repeat that — it depends on your BUSINESS PLAN. Obviously suspicion reigns when you do have capital and let it be known that you’d simply prefer to play with everyone else’s.
There are several ways to handle either situation. Honest disclosure of your limited finances is a start. Don’t allow lenders to think you’re holding back and afraid to risk your own capital. If you do have available capital, then explain that your cash is committed for working capital and can’t be used for fixed startup costs.
Many entrepreneurs overcome the “owner’s capital” question by contributing personally owned equipment, vehicles, or patents to the business. It satisfies most lenders, testing your commitment to gamble on your own business. THUS, commitment doesn’t necessarily have to be in the form of owner’s CASH!