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Practicing credit restraint makes difference

Problems with credit, both corporate and personal, are rampant today. Almost every advertisement on TV shows some happy folks who have just refinanced their home and paid off their credit cards and will certainly live happily ever after. Naturally, there’s no mention of changing the behavior that got them into credit trouble in the first place.

The uglier side of credit abuse is evident in the bankruptcy statistics. An appalling number of Americans are filing bankruptcy and walking away from their obligations. Not only does failing to honor one’s financial obligations tear at the moral fabric of our society, but it also drives the cost of credit higher and higher for everyone else.

Nonetheless, the unrequested credit cards keep coming through the mail with annoying regularity.
Inc. magazine is an excellent business publication and is a must read for those who wish to stay in tune with business trends and the business environment in general. Their recent special issue covering the Inc. 500 (fall 2004) has some revealing information about the use of credit by startup companies.

Arguably, 1999 was an awful year to begin a business. It was the peak of the 1990s business boom and, so, everything was downhill from that time on. New, inexperienced companies could be forgiven for assuming that the boom would go on and on. Money was plentiful and terms were easy. Why not take advantage of the situation, borrow more money and leapfrog the business plan ahead by a couple of years? Tempting, wasn’t it?

Those companies who began operation in 1999 soon faced a tough obstacle — the recession hit in March 2001. Undoubtedly, the business plans used to launch these companies didn’t anticipate a recession. In fact, there was a lot of talk by the prophets of unending prosperity about there not being any more recessions. Ever. Well, so much for unending prosperity. When the recession hit many were caught unawares and floundered under the weight of debt they had incurred to accelerate their business plan.

Many of the 1999 startups didn’t survive the recession. However, several did and are included in the 2004 Inc. list of the 500 fastest-growing companies in America. It seems appropriate to see what these survivors attributed their success.

Loading up on debt? Think twice

Lesson number one — don’t take the money. The successful 1999 startups declined the opportunity to load up on debt. Consequently, when the bubble burst, they found themselves lean and mean and survived a major economic slowdown.

When you think about it, it’s pretty simple and obvious. You can’t go broke if you have little or no debt.

Taking advantage of opportunity

Lesson number two, follows on No. 1: take advantage of the fools who overextended themselves. Business slowdowns have a cleansing affect on the economic landscape. Inefficient operations who paid too much for facilities, employees and customers and lacked solid contingency plans get washed away and leave a void in the marketplace. The opportunity to leap into the void was irresistible for the survivors, and they took advantage of the situation to expand into new endeavors and markets.

Don’t get me wrong. I’m not opposed to business debt and have used it throughout my career. Early on, I didn’t have the capital needed to start a business and bank borrowing was my only option. In essence, banks supplied the capital for my ventures because I had no personal capital. I couldn’t have done it without them. However, getting debt-free is a goal of mine and I’m almost there.

What can ordinary people learn from the surviving 1999 start-up companies? Debt is a vital tool in beginning and sustaining a business; however, take only what you need regardless of how much is offered.

Without the availability of mortgage credit, most people could not buy a home. Most agree that home ownership is a good thing and, thus, mortgage debt can be a tool for achieving a better life. Thus, one would expect that homeowners take on the debt load they can manage and work diligently to get it paid off. Unfortunately, this is usually not true.

Many get comfortable with their mortgage payment and decide that it’s time to trade up to a larger house and a larger payment. Thus, we have 50-year-old couples taking on new 30-year mortgages. Though I have no strong desire to retire on my 65th birthday, I don’t plan to be making mortgage payments when I’m 80!

Even worse, many refinance their home mortgages and pay off credit cards and then begin charging all over again. What are they thinking? A disturbing trend in America is people buying consumer stuff with credit cards, including cokes and sandwiches, and then refinancing their homes to pay off the credit cards and then starting the cycle all over again. State economist, Dr. Phil Pepper, says that, in essence, Americans are eating their houses.

So where’s it all going to end up? Americans need to heed the advice of the successful 1999 startup companies and strive to get financially lean and mean. Will they do it? I don’t think so. Plus, there’s a downside to turning our backs on credit cards. If everyone decided to heed my advice and quit using credit cards it would create a worldwide recession like we’ve never seen before. Oh well, not much chance of that happening, is there?

Thought for the Moment

Choose well: Your choice is brief and yet endless. — journalist Ella Winter (1898-1980)

Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at cpajones@msbusiness.com.

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