Dr. Jeff Cornwall is the inaugural Jack C. Massey Chair in Entrepreneurship at Belmont University in Nashville, Tenn. Dr. Cornwall's current research and teaching interests include entrepreneurial finance and entrepreneurial ethics.

Dr. Jeff Cornwall is the inaugural Jack C. Massey Chair in Entrepreneurship at Belmont University in Nashville, Tenn. Dr. Cornwall's current research and teaching interests include entrepreneurial finance and entrepreneurial ethics.

Social Media Can Challenge a Small Business

If you are a B2C business model, social media is probably near the top of your list for reaching your customers.  If current statistics about social media are to be believed, about half the world’s population now uses social media.

However, for small business owners, knowing how to effectively use social media to promote your business can be daunting.

But which one?

The number one rule for choosing where to promote your business with social media is to know where your customers spend their time online.  Although Facebook is still the most popular social media site, it may not be the favorite site for your customers.  The preferred social media site varies by age, lifestyle, geography, and gender.  For example, if your target market is younger, you may have better success finding them on Instagram or TikTok, as they view Facebook as the platform where mom and grandma hang out.

Even if you think you know where your customers go to engage in social media, make sure to experiment with a few different sites.  People often go to more than one site for different reasons.  For example, they may go to Twitter for news, but Instagram for finding trendy products.

Keep in mind that social media is a moving target.  Where your customer go today, may not be where they go in six months.  It is critical to keep up with these trends.

DIY or outsource?

As social media has gotten more and more complex, even small businesses are relying on experts to manage their digital marketing efforts.

More and more entrepreneurs choose to outsource digital marketing and the management of social media.  As Steven Clayton explains in his post at SmartBrief, outsourcing offers the advantages such as cost savings, specialized expertise, and better results.

If you do choose to manage your digital marketing in-house, make sure you understand all of the ins and outs of social media.  Christina Newberry offers a comprehensive guide to effectively using social media in her post at HootSuite’s blog.  How does she suggest getting started?  It all starts with a social media plan:

But before you leap in feet first, remember: every good business strategy starts with a good plan. Yes, you can use social tools for free. But the time and effort involved still represent an investment in your business.

Without a plan, you have no clear goal for what you’re trying to achieve. That means there’s no way to know if you’re getting a return on that investment.

Effective management of social media requires the right tools.  Here, here, and here are articles that offer reviews of social media tools.

7 Common Elements When Transitioning from Founder to CEO

Image by Gerd Altmann from Pixabay

When entrepreneurs start their first business, not only is it their first time as a business owner, but also their first time as a CEO.

Being the “CEO” means very little in the early days, but as the company grows, the title of CEO takes on more meaning. Defining your role and your style as the CEO of your company takes planning and specific effort on your part. It may even feel a bit awkward at times, but you have to establish what your role will be as the CEO.

Growth Changes Your Job

Many entrepreneurs start their businesses because they like the hands-on part of their business. Engineers like to engineer. Furniture makers like to build stuff. At some point in the growth of the business, the entrepreneur begins to move away from the hands-on part of what their company does. This can be a painful and frustrating period.

As they move away from the hands-on, entrepreneurs must learn the other strengths and weaknesses they bring to the business.

If you have a knack for numbers, keep the financial management of the business part of your core responsibilities.  If you are good with customers, don’t be in a hurry to give up selling and customer relations.

Your “job description” as CEO should be a reflection of your skills, abilities, and knowledge.  However, no matter what your specific role as the CEO is in your business, growth demands you start to build your team.

Delegation Hesitation

There are three common mistakes that entrepreneurs make when delegating.

The first mistake is being hesitant to delegate.

When first beginning to delegate to employees, some entrepreneurs might feel that no one can do what they do as well as they can do it. Employees might not care quite as much as the entrepreneur does. After all, this is your business, and your reputation is tied to its success. To employees it is simply a job.

To overcome this hesitancy to delegate, entrepreneurs should remind themselves that sometimes “good enough is good enough.” While employees may not carry out the tasks delegated to the level of perfection you would, they can learn to perform these tasks well enough for the business to run smoothly and for customers to stay satisfied.

Moving Too Quickly

The second mistake entrepreneurs make is rushed delegation.

Rather than being hesitant to delegate, entrepreneurs who make this mistake seem as if they can’t wait to get tasks off their plates. We see this quite often with serial entrepreneurs who are so eager to get to their next new business idea that they don’t take the time to get their current one running properly before moving on.

These entrepreneurs delegate without providing proper training and without giving clear expectations for performance.

In the rush to delegate, tasks and responsibilities can also end up being assigned to the wrong person or mistakenly to multiple people simultaneously. This can lead to chaos and frustration.

To overcome rushed delegation, develop a clear and detailed plan that includes what needs to be delegated, who should be assigned the task and what needs to be done to prepare employees for their new responsibilities.


The third mistake is undermining the delegation process.

Even after the delegation of tasks and responsibilities, employees will still tend to want to go directly to the entrepreneur to get an answer to a question or to make a decision, instead of going to the person now assigned to that area. If the entrepreneur answers that question or makes that decision, it will completely undermine the authority of the person it has been delegated to.

I developed a “seven-second delay” to avoid this mistake. When I was asked for an answer or a decision I would always pause for a few moments to ask myself, “Is this still my responsibility or have I delegated this to someone else.”

If I had delegated it, I’d answer by sending them to the employee to whom I had given that responsibility.

Delegation is a lot like raising teenagers. At some point you have to begin to let go so they can learn — and grow up. With your business, if you don’t learn to let go and delegate, your business will never successfully “grow up” to the next stage of development.

7  Common Elements of CEO Job Description

As founders build their team and delegate responsibilities to their leadership group, they must pay attention to seven elements that are part of every entrepreneur’s job description as CEO:

  • Growth can be stressful for everyone in the company.  The entrepreneur must remind everyone of the vision as to where the business is headed and provide inspiration for the company’s potential.
  • The entrepreneur must be the keeper of the culture and lead the efforts to create an intentional culture that represents the founders’ values.
  • Growth requires resources.  As the CEO, the entrepreneur is responsible for securing the necessary resources to ensure successful growth.
  • The entrepreneur must work with the leadership team to create systems that will support ongoing growth and ensure customers’ needs are being met.
  • The structure of the business should never “just happen” as people get hired into the business.  The entrepreneur must ensure that structure is tied to the strategy, culture, and business model of the company.
  • As CEO, every entrepreneur must be prepared to be the chief strategist and adjust the direction the business takes based on changing market demands and opportunities.
  • Finally, as CEO, the entrepreneur serves as “emotional shock absorber” to keep a positive climate in the business, even when the business faces the inevitable challenges that are part of growth.

By integrating these elements into your job description, you will be on the path to becoming a more effective CEO of the business you founded.

Symptoms of Growing Pains

Image by PublicDomainPictures from Pixabay

“The biggest cause of failure in business is success.”
(A favorite saying of my late father, RM Cornwall)

“Every time the business owned by an entrepreneur who banks with us starts to grow, I get nervous.  And if it grows quickly, I go on high alert!”
(A banker who wishes to remain anonymous)

When I look back at a failed entrepreneurial venture, its demise can most often be traced to one of two causes.  Either their business model was flawed from the start or they were not prepared for their business model to succeed and had trouble handling the growth that followed.

Business Transitions

During growth, entrepreneurs must lead their businesses through various stages of development.  One of the best models to help entrepreneurs understand these changes was developed by Eric Flamholtz.  In their book (now in its 5th edition) Growing Pains, Flamholtz and Randle present a practical model that helps entrepreneurs understand the stages of business growth.  A fellow entrepreneur gave me a copy of this book in its first edition while we were managing the rapid growth of our healthcare business back in the 1990s.  I have been recommending it ever since, and have had the authors as our guest speakers at Belmont several times over the years.

In the early stages of growth, the entrepreneur engages in what Steve Blank refers to as the Search Process for the basic business model.  The entrepreneur is finding a gap in the market, and developing a product or service to address that market need.  This is where the testing and pivoting of the business model occurs.

Building a Business

Once the business model begins to show signs of market traction, the next stage is to secure the resources the business needs to grow.  The entrepreneur must secure the cash, talent, materials, facilities, and so forth needed by the business to support its growth. If the entrepreneur fails to secure necessary resources, even the most promising business model can fail.

In the ensuing stages, Flamholtz and Randle chart the path to successfully navigate growth.  First comes the development of critical operating systems, including financial systems, marketing systems, production systems, and human resource systems.  Next comes the development of key management systems, including planning, organizing, leadership development, and performance development.  Finally, the entrepreneur must build an intentional culture to ensure the sustainability of the values and beliefs the founders brought to their business at its inception.

New Challenges Around Each Bend in the Road

Each stage in the development of the business leads to specific new challenges in the next stage of growth.

The entrepreneur must watch for a wide array of critical symptoms that warn of impending crises involving customers, employees, and the organization itself.  If these symptoms are detected early enough, the entrepreneur can act to prevent significant challenges or even the possibility of business failure that can come from poorly managed growth.

Symptoms of Customer Challenges

Customers are the proverbial “canary in the coal mine” during growth.  Customers provide the earliest warning signs that growth is not being managed properly.

A fundamental growth challenge for early stage business is selling more than the company can possibly deliver.  In their zest to build a successful business, many entrepreneurs get out ahead of their capacity to produce their product or provide effective service.  When this happens, the company’s reputation in the market suffers.

Another symptom that a company is having challenges is when it starts to lose good customers. This may be the result of poor quality, poor customer service, or both.  Customer retention should be a key ratio for every entrepreneur to watch on their dashboard. When customer turnover reads exceed expectations, an entrepreneur should quickly diagnose the problem and take appropriate actions. Customers have little patience with a business that no longer delivers its promised value proposition.

Symptoms of Employee Challenges

Employees are also an important early warning system for growth problems.

Certainly, the entrepreneur should pay careful attention to staff turnover and employee morale during growth.  It can be hard enough to recruit enough new employees to support growth. Needing to also recruit employees to replace disgruntled workers can make it an almost impossible task to keep up with the company’s hiring needs.

Rapid growth often negatively impacts employee efficiency and productivity in their jobs. Employees never seeming to have enough time to get their basic work done or spending most of their time putting out fires may be sure signs that the entrepreneur should slow down growth and take corrective actions.

Other employee related symptoms of growing pains includes poor communication, a lack of understanding of the vision, and a general insecurity among workers.

Symptoms of Organizational Challenges

Finally, there are symptoms at the organizational level that also need to be monitored.

A constant shortage of critical resources, overwhelmed operating systems, and ineffective planning can all be signs that an entrepreneur is not prepared for the growth of the business.  I will address all of these more in future posts.

The most disconcerting symptom is when sales are growing, but profits are plateauing or even declining.

No Single Cure

Overcoming the causes of these and other symptoms is no easy task.  There is not one magical thing an entrepreneur can do to achieve pain free growth.  Over the coming weeks I will be looking in depth at what entrepreneurs can do to help ensure successful growth in their business ventures.


Honesty Makes You Stronger

Image by Gerd Altmann from Pixabay

Life in the classroom is different than it was just a few years ago.  Students have had it drilled into them that during class discussions, above all else, they must not offend.  A study by the Knight Foundation (conducted in 2019) found that 68% of college students say that “the campus climate prevents them from expressing their true opinions for fear of offending their classmates.”

This new ethic makes open and honest conversations in my classes about business ideas and broader discussions about business related issues difficult to foster.

Cold Reality of Entrepreneurship

The trend of trying “not to offend” has made preparing young entrepreneurs for the world of (dare I say it) free enterprise problematic.

Markets have no feelings.  Customers don’t worry about trying to “not offend” a business when choosing not to do business with it.  If a competitor does a better job of meeting the needs of the consumer, that is where consumers will spend their money.  Period.

My job has always been to prepare entrepreneurs for this brutal world.  I do this by challenging them to get honest feedback from the market about their idea by teaching them the tools they need to get information (good and bad) to use to improve their business models.  My job then becomes reinforcing the message the market is giving them as I coach and mentor them.

I described my role in a blog post that I wrote a dozen years ago:

Entrepreneurs seem to always have plenty of cheerleaders.  Family and friends are there for encouragement and lifting your spirits.  A good mentor is someone who will tell you the truth — even if it hurts.  My students and alumni will sometimes refer to being “Cornwalled”.  When they bring their ideas or fledgling businesses to me for advice, my job is to try to find every weak spot, every possible flaw, every vulnerability they face in the competitive market.  One student once said to me, “Dr. Cornwall, you are such a Dreamkiller.”  As much as I would love to join the ranks of cheerleaders, I know that my role has to be to help ensure they get their business right and find their way to be able to thrive in the market.

Criticism is Not Failure

A common reaction I see from many young entrepreneurs when they are given constructive criticism of their ideas is that they either ignore the information or they give up on their idea.

Last semester I used our family business in an introductory class as an example of the process entrepreneurs go through when pivoting their business models.  When we launched our business, the market challenged our assumptions on multiple occasions.  Each time, we used the information to pivot our business model to help our business thrive.

My intent with this example was to offer a concrete example of the reality of the entrepreneurial journey.  Entrepreneurship requires open-mindedness, determination, and persistence.  My goal was to encourage and inspire them.  For many in that classroom, it had the opposite effect — it discouraged and even demoralized many of them.

The message we need to offer to this generation is that criticism is not failure.  And in many cases, criticism is a critical ingredient for eventual success.

All is Not Lost

What is encouraging to me is that not all of my students are unwilling to hear honest feedback about their ideas.  In fact, if approached the right way, many are actually quite receptive.

However, I have had to make significant adjustments in my approach to teaching young, aspiring entrepreneurs.  I have learned to be a bit more measured in how I coach them.  Rather than starting with a blast of honesty, I slowly build to a crescendo of constructive feedback.  I have learned to be more patient. I have learned the power of being kind, compassionate, empathetic….and honest.

I continue to be very proud of the number of students who are becoming successful entrepreneurs.  They understand the importance of listening to the market and seeking constructive feedback from mentors.  Most importantly, they are learning to not be offended by honesty.

Pitching Investors in the Post-COVID World

Image by Engin Akyurt from Pixabay

Pitching to investors has always been like playing whack-a-mole.   Connecting with the right investor at the right time can be quite tricky.

Now add all the impacts from COVID-19.  Angel investors all but disappeared in the second quarter amid he pandemic chaos.  Venture capital firms became much more cautious and conservative in their funding, trying to mitigate their risk amid almost infinite uncertainty.  More than we have seen in many years, traditional savings skyrocketed as both people and companies fled to cash for financial security.

Many angels who were still investing focused on shoring up companies already in their portfolios with additional capital.

Bright Spots Emerged

Toward the latter half of 2020 and moving into 2021, certain segments emerged as investor favorites.  HealthTech, FinTech, CleanTech, EdTech, and eCommerce are seeing a continued increase in deal flow.  The success of Zoom is making deals that offer better efficiency in business-to-business transactions a new focus of investors, as well.  Deals with strong elements of “sustainability” in the business model are seeing increased attention.

However, overall it seems that investors are moving from hot industries and industry sectors, to a much more targeted form of investing.  As the world is disrupted from COVID and the economic crisis, investors are now focusing on a broader range of deals that focus on specific problems arising from the sudden changes in our world. Investors are seeking opportunities that fit what they see as the “new normal.”

Even if it takes a bit of pitching gymnastics, try to highlight any COVID overlay in your business.

Zoom Becomes the New Investment Marketplace

And then there is Zoom….

The events of 2020 brought an abrupt end to localized start-up pitch events.  Gone are the days of live Demo Days.  The ritual of making the rounds from VC board room to VC board room to VC board room are no longer happening.  Gone are the massive investment conferences.  Everything is now on Zoom.

The entrepreneurship world quickly adapted to the new normal of raising funding.  It had to happen, even with COVID, as entrepreneurs still need funding and angels are still looking for fund deals.

Inboxes now fill up with Eventbrite invitations to Zoom pitch events.  Meetup groups now facilitate bringing together investors and entrepreneurs via Zoom.  No more standing in front of a room full of investors and entrepreneurs.  Now entrepreneurs pitch into the little green dot on their computer.

Just as there was an unwritten set of rules, expectations, and norms for live pitching, we now are seeing a consensus on Zoom pitching protocol take form.

Pitching on Zoom

Some things about pitching have not changed.  You need to be compelling and concise, as you only have the first few minutes to connect on a pitch.  You need to look and act the part.  Dress well; business casual is generally the norm.  Since you no longer have body language to communicate your confidence and enthusiasm, you need to show this through your voice.

Here are a few tips specific to Zoom pitches I have been hearing from both experienced entrepreneurs and angel investors:

  • Make sure you have good lighting.  Natural light is best.  Avoid any back lighting that may come from windows and bright lights.
  • Make sure you have a strong Internet signal and have a backup plan.
  • Technology matters.  Invest in a high quality webcam if yours on your computer is not very good.  The same goes for your mic.  When recording classes for my university students this past summer I was blown away by how much better the video and audio were when I upgraded from my 2015 MacBook Pro to a 2019 model.  I went back and re-recorded all the lectures I had done on my “old” MacBook Pro.  It made that much of a difference!
  • Calm yourself before you get on Zoom.  Most of us do this before a live pitch, but forget how important it is to be “centered” when hopping on Zoom for a pitch.
  • Don’t pitch continuously for more than about 5 minutes at a time.  Break your pitch up and go off of screen share to answer questions and to help keep them engaged.

Pitch Deck 2.0

Even the pitch deck has evolved post COVID.  You should have two versions of the same pitch deck prepared.

First, entrepreneurs still need to prepare a traditional pitch deck for live pitches on Zoom.

The second is what is being called an investor pitch deck, an annotated pitch deck, or a stand-alone pitch deck (there is still no consensus on the preferred term).  It should be organized exactly like the deck used for your live pitches, except that most of the slides will be split in two. The one side includes the same graphics used in the oral pitch. The other side includes a short narrative including what you would be saying about that slide during a live pitch.

Use the widescreen format for your deck to make plenty of room for the two sides.  There should be no more than 150 words per narrative section on each slide on the narrative side, with the ideal word count being about 50-100 words.  There is no need to include the narrative side text on slides which are self-explanatory, such as financial summaries, timelines, and so forth.  The split between the two sides should be about 40% for narrative, and 60% for the graphic side.

This is the version of the deck you want to send out to investors who want to preview your deal before meeting with you over Zoom.  Think of it as an executive summary of your business plan with pictures.

The Good News into 2021

Deal flow is increasing as we enter into 2021.  The strong market on Wall Street and cheap capital has buoyed investor confidence and their portfolios.  We are seeing more angels get back into seed investing, which is outstanding news for startups!

Unless COVID takes a nasty turn for the worse (what John Mauldin calls the “gripping hand” of the economy), things are looking up for a better year for startup entrepreneurs.

Do You Really Need a CFO?

Image by Oliver Menyhart from Pixabay

“Maybe it’s time for you to get a Controller.”

I have said that to entrepreneurs more than once over the past few months.  In every case, all of these companies had already brought in a person designated as CFO (Chief Financial Officer) to lead the financial aspects of their company.  And in every case, that was the wrong type of person to hire for the specific needs of these companies.

What Should be Your First Hire?

Entrepreneurs who experience significant growth in their business may eventually hear this advice, be it from their CPA, their banker, or other entrepreneurs. Financial management in a growing business can become strained.  Eventually, the time will come when the entrepreneur needs to upgradecertain members of the team.

The first instinct of most entrepreneurs seems to be to hire a CFO.  In some cases this may be the right choice, but in many situations a controller or even a senior level bookkeeper might be what is really needed.

Let’s assume what you need to get done is the following:

– Keeps accurate records of financial transactions and also creates basic financial statements (Income Statement and Balance Sheet) using accounting software.

– Performs basic accounts payable management — makes sure bills get paid and records these entries into the accounting system.

– Performs basic accounts receivable management — if the business has to send invoices to customers to receive payment, sends out invoices monthly.

If this is the list of functions that need to be taken care of, you really need a senior level bookkeeper. These are the functions that would be in the job description of an experienced bookkeeper.

What Comes Next?

As a company grows and becomes more financially complicated, a controller adds more horsepower to the financial management team. Depending on the nature of the company, this often happens when the business grows to about $1 million to $3 million in revenues.  (Although, I have seen companies much larger than that get by with a solid bookkeeper and a hands-on outside CPA).

A controller does the following tasks:

– Performs all of the functions of a bookkeeper or supervises the staff that does.

– Creates customized daily, weekly and monthly financial reports to meet the specific needs of a specific business.

– Chooses and maintains financial software.

– Provides basic cash flow management of the business. Major cash flow decisions should still be made by the entrepreneur, however.

Good controllers can pay for their salaries in a growing company.  They do this by helping to create needed financial systems, by keeping costs under control, and by helping to manage cash flow more effectively.

When Do You Need a CFO?

One situation that may require a CFO is if a business must raise a significant amount of outside funding to get off the ground.  This is particularly true if the CEO/founder does not have a strong financial background.

Some businesses may grow to the point that they need a CFO, but this is not true for every business. Many very large organizations don’t have CFOs. If the capital needed for growth must come from complex debt instruments, private equity, or venture capital, a CFO is likely to be an important addition to the leadership team.

A CFO does the following tasks:

– Performs all functions of a Controller or supervises a staff that does these tasks.

– Structures and negotiates complex financing — including both debt and equity.

– Creates complex financial projections to aid in strategic decision making and is an active player in the strategic management of the business.

– Manages banker and other financial relationships for the business.

The Risks of Adding the Wrong Position

One risk of hiring the wrong person is that you end up overpaying for what you really need done.  The typical salary of a controller can often be at least twice as much as the salary of a senior bookkeeper and an experienced CFO earns easily twice as much as a controller.

If a CFO does not have enough work to do in the financial management of the firm, idle hands can become the devil’s workshop.  I have seen CFOs who become overly involved in the strategic decision making that should be the domain of the founders, sometimes creating unnecessary descent and conflict.

The titles “bookkeeper”, “controller” and “CFO” often get tossed around rather loosely. Many entrepreneurs give the title of CFO to people who are not qualified to be one.  They may do this to help bolster the external perception of the company, or simply to offer a nominal reward to someone in place of higher salary. However, to bankers and investors, titles within the financial management of a business have specific meaning.  If you give the title of CFO to someone with the knowledge and qualifications to be a senior bookkeeper, you may destroy the credibility of your business with bankers and investors.

Finding the Right Person

Use your advisors, CPA firm, your banker, and your network of experienced entrepreneurs to determine what type of financial professional your business actually needs.  Once your needs are clearly established, these same people can also help you find a pool of candidates to interview.

Good Debt. Bad Debt.

Image by walkerud97 from Pixabay

Young entrepreneurs generally seem to be reluctant to consider using debt to help finance their businesses.

The reasons they cite are many.  Often, they are concerned that they already have a heavy debt burden due to student loans from college.  Others tell me they watched their parents get deep into debt and don’t want to do the same.  The requirement to sign personal guarantees for business debt terrifies many young entrepreneurs.  More than a few tell me that Dave Ramsey’s anti-debt message shaped their negative perceptions about debt.

When I tell my students that, generally, I prefer debt over equity financing, I see shock on many of their faces.

Bad Debt

There are certainly many instances when taking on debt financing for a business is not a prudent decision.

When I hear of entrepreneurs maxing out credit cards to finance a startup, it sends shivers down my spine.  I know that there are countless stories in entrepreneurship magazines about “heroic” entrepreneurs who went tens of thousands of dollars in debt with credit cards to create incredibly successful businesses.  But for every successful use of credit cards to launch a business, I have seen dozens who end up with failed businesses and mountains of credit card bills that haunt them for years.

Bankers can tell countless stories of business owners with business models that are no longer competitive seeking loans to keep their failing businesses afloat.  Rather than keeping these businesses on life support by continuously pouring money into them, these entrepreneurs need to come to the hard realization that they have come to, what I call, an “Old Yeller” moment.  Sad, but true.

Some debt funds short-term needs for cash, while others fund longer term investments in your business.  However, sometimes we use debt for the wrong purpose.  For example, when I was a young entrepreneur, I used a line of credit to invest in things that were actually tied to growth capital.  A line of credit is meant to fund short-term timing issues with cash flow, such as funding inventory purchases or paying for payroll on a project that will be billed upon completion. I used it for hiring staff and adding new space that would take much longer to generate cash flow. 

Fortunately, I had a good banker who helped coach me on the proper uses of lines of credit. He also provided us with a long-term term loan to use to fund the investments we needed to make in staff and space to grow our company.  I never made that mistake again!

Good Debt

Good debt begins with debt that your business and you can support.  This is how bankers make decisions on making loans.

Bankers always look to multiple means of repayment when making business loans.  The first source of repaying is a healthy business with more than enough cash flow to fund the debt.  The second line of defense to ensure loan repayment is the personal guarantees of business loans by the business owners.  If your financial house is not in order, your chances of getting a loan for your business are diminished.  Finally, bankers will use assets pledged as collateral to pay off business loans, but only as a last resort.

“Bankers only give loans to people who don’t need it,” is a common refrain I hear from small business owners.  The reality is, bankers only give loans to people who they are highly confident can repay those loans.  After all, it is our deposits in the bank that they are using to fund loans.

Bankers understand what makes good debt, and you should understand and follow their criteria for using debt. 

Use With Caution

The requirement of personal guarantees are a sobering aspect of taking on a loan for your business.  Keep in mind, personal guarantees are not only a financial tool used by banks.  It is also a psychological tool.  If you are not confident enough in your business to personally back the loan, then why should the bank?

Another risk with taking business loans is that although your business might be solidly bankable when a loan is made, times can change.  We need to look no further than the thousands of loans that went from safe and solid earlier this year, to being rated as highly at risk for default after pandemic took hold.

When you need to use debt, make it a priority to pay down your business loans as quickly as possibly. Certainly, don’t pay off your loans so aggressively that it hurts your cash flow. However, once you have a good cash position, the next most important goal is to pay off your loans.

The reason I prefer debt to equity is that debt is like a house guest.  When you pay it off, it goes away.  Equity is like adding a new member to your family.  Once you take their money, they are there to stay!