Generating consistently high investment returns is extremely difficult. That's how Bernie Madoff could attract billions of dollars to his investment fund--investors couldn't resist the "unusually consistent" annual returns of around 10 percent.
While 10 percent might not sound like a lot, it's actually an outstanding return. Using the Rule of 72, generating that level of return means that in just over seven years you would double your money.
But what if you could generate a 16 to 20 percent annual return? Even Warren Buffett would bow in your general direction; as Buffett recently said, "I don't know how to make 18 percent."
Hold that thought.
Many business ventures require spending money before they can make money. Some businesses take years to turn a profit. (Hi, Amazon!) And a significant percentage of startups fail because they never turn a profit, much less earn back the initial and ongoing investments.
That's why many side hustlers start businesses that they can fund through savings, or, better yet, that they don't need to fund at all. By providing a service that requires only the tools they already have. By selling products they either make or can procure by consignment. By proving to themselves that there is a market -- and that they can serve that market -- before they take on any debt.
While it's tempting to think, "If I buy this, and this, and this, then I'll have a real business."
But the only real business is a business that turns a profit. And it's a lot harder to turn a profit when you have to pay off debt you didn't need to incur.
So before you decide to go all-in with on Ramen noodles and sleepless nights and maxed-out credit cards to fuel your entrepreneurial dream, remember this.
Time is precious, and time is definitely an investment. But what you'll learn from starting a new venture, even if that venture fails, can be invaluable. Every successful person has failed. Most have failed a lot more often than the average person; that's why they're successful now.
Learning, in trying, in gaining experience, in collecting lessons learned--that's an investment with a real return.
The same is not always true for borrowing money. Borrowing money should also provide a return. Yet that return that can be even more difficult to achieve, especially since credit card companies will typically lend more than you can afford.
Plenty of failed entrepreneurs admit they started their business as a way to rationalize the purchase of something they always wanted to own. A bigger workshop because they "needed" room for more equipment. A new truck or van because they "needed" to make a great impression on customers and "build their brand."
Before you take on credit card debt to fund aspects of your business, ask yourself a few questions:
- "Will the money I spend touch my customers?" If not, don't borrow it.
- "Will the money I spend improve an efficiency that matters?" Buying a certain tool could make you twice as fast at performing a certain task, but if you currently don't have enough customers who will pay you to perform that task beyond your current capacity, who cares? Stay" inefficient" until you have enough work to make greater efficiency actually matter.
- "Will the money I spend actually generate revenue?" Infrastructure is nice. Amenities are nice. "Stuff" is nice. But generating revenue is everything -- and the more revenue you need to generate to pay off debt, the harder it will be to turn your business into a success.
As Buffett said, "If I owed any money at 18 percent, the first thing I'd do with any money I had would be to pay it off. It's going to be way better than any investment idea I've got."
That doesn't mean you should never use credit card debt to start a business. If your plan is solid and the path to profitability seems clear, using short-term debt to finance your startup could be a smart decision.
Just make sure you think it through.
As is true with many things in business and life, just because you can doesn't mean you should.