5 Reasons Debt is the New Slavery

The rich rules over the poor; and the borrower becomes the lender’s slave. Proverbs 22:7

Last week in the post “Drudgery or Freedom“, I discussed five ideas that will bring more freedom and excitement to your finances. The very first one is to avoid Debt. There is nothing more debilitating and deflating to your finances than debt. It has a huge impact on your freedom to live and you might not realize it.

Nearly 10 years ago, my wife and I had over $50,000 (not including the mortgage) in debt ranging from credit cards, student loans, and an auto loan. Together we went through a book called “Total Money Makeover” by Dave Ramsey. Over the period of the next 2 years, we paid off this debt with an income of about $100k per year. It took intentional focus and sacrifices that were not popular or easy.  Eventually, the book says to build up a six-month emergency fund which we accomplished shortly after. We felt so much more at peace once the debt was gone and we had an emergency fund. In 2015, I lost my job with four kids and a wife who homeschools them. I am so thankful for the emergency fund.

After some soul searching, I decided to start my own business providing accounting and finance services (fractional CFO services) to small business and nonprofits. There is no way we could have done this without the emergency fund. The only debt bill was our mortgage, so we were able to last much longer building up the business.

For those who are business owners, whether full-time or on the side, there is also a significant temptation to get into debt. I don’t think this is necessary most of the time. Read “Show Me the Money – 12 Ways to Fund Your Business“.

As a business owner, debt can be quite burdensome and requires a ton of work. Below are 5 reasons why I would avoid debt as much a possible.

1. Distracting and Time-Consuming

There are plenty of distractions that keep us from strategically working on our business. I won’t go through them all, but you don’t need another stress to worry about. Lenders will ask us to review the debt and send them reports. You might have to apply for new debt, and the application process is time-consuming. Also, you have to make more payments and keep records. Not only do you have more emails, bills, and administrative work, but losing time is valuable. Whenever you are spending time on tasks related to dealing with debt, you are not spending time on business development, servicing your customers, or focusing on strategies to grow and add more value in less time.

2. Forces Bad Decisions

How could debt force you to make a bad decision? You could decide to accept a client that is not ideal because you desperately need the business to pay the debt. You might decide to work harder and longer to pay off debt at the risk of personal health and time with kids and family. Sometimes even hitting a certain ratio that the bank requires may not be ideal for your business plan.

3. False Sense of Security

What if you are in the habit of looking at your bank account to decide how well your business is doing? When you see a lot of cash in the bank, you spend more and expand. According to the book “Profit First”, this is a common habit among business owners. If you just received cash due to a loan, it is not a reason to go on a spending spree. You might feel better and more secure, but your Net Worth has dropped.

4. Too Much Growth Too Fast

It is tempting to grow faster than you can handle when you have the cash to spend, hire, and expand at quick levels. The problem is that with each level, you experience new devils. We should always be growing, but we also need time to develop the processes, training, and strategies to grow smart. Otherwise, you can create chaos. You could create a stressful place to work, have high turnover, and low-profit margins. In fact, you may even be losing money, but you are growing too fast to notice it.

5. Loss of Control

What if you had a bank call your loan? This could ruin your business. Anytime you are relying on a lender to keep your business afloat, you have lost control. Does it feel good to lose this control? The stress of this is overwhelming and can have a negative impact on your enjoyment of being a business owner.

Conclusion

Hopefully, you can see how debt adds to distraction, stress, bad decisions, and loss of control. I can’t imagine any of you would want to work for or create a business like this. Therefore, even though it is hard, we have to work to avoid debt. It is amazing how when we work within certain constraints we can figure out how to do something. I am not saying it is easy, but it is more rewarding and more peaceful. Also, it makes finances much more fun.