When you think about the features of a successful business, what comes to mind? Impassioned CEOs? Sky high sales? A robust bank account? Whatever you conjured up, we’re willing to bet “debt” wasn’t the first feature on the list. There’s a pervasive myth that only poorly managed companies take on debt. Few notions need to be challenged so badly.
A distinction must be made between a poorly managed company and poorly managed debt. Under the right circumstances, debt can become a key factor of success. You’d be surprised to learn just how many well-known brands have relied on strategic debt to get where they are today. If you avoid incurring debt because you think it’s bad business, there’s a good chance you’re making a mistake. In this article, we’ll take a look at three companies that masterfully used debt to their advantage, and why you should too.
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A Word on Good Debt vs. Bad Debt
Before we begin, let’s get one thing out of the way. We’re not encouraging you to indiscriminately seek out as much debt as possible. Debt is not something to be piled onto your business and taken on at all costs. But it should not be universally avoided either. If you happen to be one of the subs who considers debt a last resort, our goal is to challenge that idea – to make you give debt a fair shake.
Good Debt
Forbes describes good debt as money borrowed by business owners to pay for items that will contribute to the growth and development of their companies (just to get a straightforward definition on the table). That could be equipment to help you transition from residential to commercial, or materials for a new job. But here’s what fundamentally separates good debt from bad debt: Good debt is strategically sought out, with thoughtful consideration given to the interest rate, terms and how the sub will pay the debt will be paid back. Good debt alleviates strain on your cash flow, but with a solid plan in place to pay it back in due time.
Bad Debt
Bad debt, by contrast, can include loans and credit cards that you took out, while knowing you had no feasible way to pay them back — all while they accrue massive interest. Additional debt taken on to pay back money you already owe also falls under the umbrella of bad debt. Bad debt bogs down your company and keeps you locked in a vicious repayment cycle. It’s often offered by predatory lenders who profit off poor financial decisions.
We are resoundingly endorsing good debt. Not all debt. With that out of the way, let’s take a look at some of the most successful companies in the world and how debt was and still is integral to their success.
3 Large Companies That Benefit from Debt
Successful. Companies. Borrow. From startup costs to working capital, there are always reasons why a company needs access to funds that won’t erode their cash flow.
Here are 3 examples:
Uber
The rideshare giant, valued at $66.6 billion, doesn’t shy away from debt. They recently raised a $2 billion leveraged loan. That said, the financial mechanics of corporate giants are incredibly complex, and so are the reasons they took out this loan. In their case, $2 billion in debt as a source of cash flow was better for them than seeking out more investors, which dilutes everyone else’s share of the company. Debt is universally recognized as a cheaper source of funding than investor equity, but that would lead us to a discussion on the (many) unique benefits of debt, which we’ll unpack in Part 2 of this article.
Even as a thriving company, Uber has been comfortable and open about carrying debt. As of March 2022, Uber Technologies had $9.53 billion in debt, with $4.18 billion in cash, leading to net debt of about US$5.35 billion. Most importantly, shortly after they took on their latest debt, Uber turned their cash flow positive for the first time ever. Although these astronomical figures may make this example seem less relatable, it bears noting that the same principle applies to subs who should consider taking on more good debt. Good debt can be the cure to cash flow strain.
Airbnb
Prior to the massive success of Airbnb, founders Brian Chesky and Joe Gebbia were hedging their bets on the company, and racking up substantial credit card debt in the process. Chesky owed about $25,000 and Gebbia owed tens of thousands. “You know those binders that you put baseball cards in? We put credit cards in them,” says Chesky. Not to say this wasn’t risky, as they were launching a new company and didn’t know where things would end up. But if they hadn’t had debt as a resource in the beginning, it would’ve hindered their initial efforts.
Today, they haven’t shied away from acquiring more debt as necessary. As the world’s highest-valued short-term rental marketplace, they raised $1 billion in debt financing in 2020, leaning on good debt to help them through the pandemic. Even while operating at a net loss, debt allows them to maintain a positive cash flow.
Whole Foods
Grocery giant Whole Foods was founded on a borrowed sum of $10,000. But perhaps the more interesting side of Whole Foods’ relationship with debt comes from its Amazon acquisition story. As many know, Amazon purchased the grocery chain, and would have had more than enough cash on hand to buy it outright. But they decided not to. The Washington Post released a headline in 2017 that read: Amazon had all the cash it needed to buy Whole Foods. It borrowed money to anyway. The article read:
“Amazon preferred to borrow money at low interest rates over as long as 40 years instead of tapping its $21 billion cash hoard. So why did Amazon borrow when it could pay for the purchase with stock, or cash or with its $10 billion in annual cash flow? “It makes sense,” said Rajeev Sharma, director of fixed income at Foresters Financial. “Amazon is taking advantage of the fact that their debt profile is really manageable.”
On the one hand, Amazon might’ve had $21 billion in cash to spare, but it didn’t make sense to draw $16 billion of it to fund a singular purchase. By keeping a tight, manageable amount of debt (and not letting it balloon out of control), they could comfortably make the decision to finance their purchase of Whole Foods, and protect their cash stores for a rainy day.
In addition to these anecdotes, if you want a deeper look at some of these reasons why borrowing is necessary and healthy, we recommend taking a peek at this article released by Touch Financial. They did a great job outlining exactly why successful companies can and should borrow money.
How to Approach Your New Relationship with Debt
Still feeling hesitant? At an individual level, avoiding debt seems to make sense. We’re taught from a young age to live within our means, aren’t we? Debt is often misused to help someone live outside their means, and it can get them in trouble if they’re not careful. It’s possible that that’s where a lot of business owners’ apprehension comes from.
Business borrowing, on the other hand, is an entirely different story. “Debt” isn’t even the best term. It ends up becoming a catch-all that doesn’t account for the nuances that separate business debt from personal debt. The good, shrewd debt to which we’ve been referring in this article — the better word for it is “leverage.” By borrowing money as a sub, you’re leveraging the lender’s money to achieve something that will grow your business and boost its value (like completing a job).
If we’ve managed to soften your perception of debt, you may be wondering how to strategically use it in your business. We have an entire article that dives into responsible uses of debt for subcontractors, so be sure to give it a read. At a high level, we encourage you to meet with your team and draft a plan outlining your growth initiatives, why they’re attainable and how you plan to achieve them. Draft a budget that factors in your expenses and cash flow, to make sure you’re not taking on debt you can’t afford. Beyond that, material purchases and pay applications can be perfect areas of your project to use debt strategically.
As you evaluate upcoming projects, consider:
- How much material is needed
- What that material will cost
- How long your supplier will give you to pay for those materials
- When you’ll get paid for the project, in relation to when your supplier invoice is due
Because most pay apps take 60-90 days to process, many subs end up in a cash flow crunch when supplier invoices are due. When a sub opts instead to finance their materials, they avoid this issue. Billd is a good debt solution for material financing because it allows you to purchase all your material upfront, secure a cash discount from your supplier, and have 120 days to pay back what you borrowed to buy them. You’re more than welcome to consult with a Billd representative on how material financing can be leveraged.
