Dave Says – On Business Edition

(New shop needs equipment)

Dear Dave,
Not long ago I was laid off from my job at an auto repair shop. I have some tools of my own, and was thinking about opening my own business. The problem is there are some tools I still need and can’t afford. Do you think I should get a small loan – maybe $15,000 – to set up my shop and get into business?
George

Dear George,
I can’t recommend that you go into debt to start this business. Don’t get me wrong, I love it when a person has the drive and talent to open their own business. But right now you’re unemployed and looking at going into debt. That’s not a good plan.

According to the Small Business Administration, nearly 80 percent of new businesses fail within the first five years due to debt payments. I started my business on a card table in my living room years ago, so I know it can be done without going into debt.

George, you have your own tools and the know-how. Find a place to work, do the jobs you can with the tools you have and then save up for the other tools you need. If you’re talented in your field and you move slow and smart on this deal, you’ll have a thriving business on your hands and no debt to eat up the money you make. This way, you’ll own the business instead of it owning you!
—Dave

(Capital reserve important?)

Dear Dave,
I’ve had my own business for a few years, and I’m finally starting to see some real money. I want to make sure I don’t mess things up now. How important is it for a small business to have some kind of cash reserve?
Ken

Dear Ken,
This is a great question, and I hope other small business owners and folks thinking about opening a business will pay attention. You always need capital reserves for a small business – always!

You know how I stress the importance of having an emergency fund of three to six months of expenses in your personal finances? The same principle applies to business. When business slows down or the economy does a nosedive, having a cash reserve will soften the blow and help you make it through the lean times. And if something goes wrong or breaks down, it will turn a disaster into nothing but a minor inconvenience.

Not only that, but it can help grow your business debt-free. At some point you’re going to hear about a good opportunity. Good opportunities have a way of becoming great when you’re paying with cash!
—Dave

(Buy father’s small business?)

Dear Dave,
I’ve got the opportunity to take over my father’s small engine shop. He’s semi-retired and doesn’t make a lot with it, but he’s got about $10,000 to $20,000 in inventory already stocked. He might even just turn it over to me, but I’d have to expand it to really make a living. How can I do this and avoid going into debt?
Mark

Dear Mark,
Let’s be realistic. If you were going to start this business from the ground up you could make almost as much with it. And if that were the case you could just buy your inventory as needed, right?

In this situation you’re looking at having to buy inventory in advance that you may not have bought in the first place. In essence, you’d be buying a business that’s struggling.

You might try making an arrangement with your dad based on the inventory sold instead of buying it all outright in the beginning. Maybe you could structure it to where you’d buy the first $10,000 of inventory that leaves the shelves from him. That way you don’t have to worry about financing the business and running into debt, because you’re buying it gradually.
—Dave

About the Author
Dave Ramsey is a personal money management expert, popular national radio personality and the author of three New York Times bestsellers – The Total Money Makeover, Financial Peace Revisited and More Than Enough. In them, Ramsey exemplifies his life’s work of teaching others how to be financially responsible, so they can acquire enough wealth to take care of loved ones, live prosperously into old age, and give generously to others. Ramsey offers life-changing, financial advice as host of a nationally syndicated radio program, The Dave Ramsey Show, which is heard by 4.5 million listeners each week on 450 radio stations throughout the United States. His syndicated column, Dave Says, can be read in more than 300 print and online publications worldwide. For more small business advice, please visit daveramsey.com.