Financing is an important part of starting and growing a business. However, there are a lot of misconceptions and confusion. Many people only have experience financing a house, car, or a new couch. Yet there is a whole world of financing business equipment and software.
This episode discusses financing for business and answers the most frequently asked questions.
Why do businesses finance equipment?
- Utilize banks money to start
- Keep current liquid money on hand
- Tax benefits
- Time value of money
Can a new business finance?
- Yes!
- You can use personal credit
What if you don’t have perfect credit – should you finance? What if the rate is high?
- Start now, or don’t start
- Risk and reward
- Do what you gotta do
Why not just use a credit card?
- Installment vs revolving credit
- Save your credit card for quick purchase / pay off like supplies or blanks
- Don’t use personal revolving credit lines for business
Isn’t interest bad?
- If you can make more money than the interest, you win
- Tax benefits
- Bank loans cost money, that’s the way it works. They are in business too.
- Better to do something than nothing to win
What’s the finance process like?
- Apply
- Review credit and terms with agent
- Accept, sign, deliver
What’s financing vs leasing?
What if someone has a lot of other questions?
Isn’t debt for suckers?
- Most businesses have debt
- You buy a house with a loan for the long-term benefits (equity)
- Is a car loan for a new and reliable car better than paying cash for a car that will break down?
Financing: assets vs liability
- A machine for business is different from a car
- This isn’t just adding to your bills but giving you opportunity.
- Tax benefits
- You own something of real value vs taking on debt for a vacation or new tv
Overall, financing isn’t complicated, but it feels scary. So is starting a business or buying a house. Those who take the risk are the ones who can be rewarded.
Learn more at https://coldesi.com/financing-options/
Transcript
Marc Vila:
Hey everybody, and welcome to the Custom Apparel Startups podcast. This is episode 187, and Marc Vila here doing the introduction. Usually, Mark Stephenson does it, but he is not on the episode today. Instead, we have an amazing talent and an amazing knowledge and so much more from John Sullivant of Adia Capital. So welcome to the show.
John Sullivant:
Hey, Marc. Thank you for having me. I appreciate it.
Marc Vila:
Yeah. Yeah. Great. Great. We really appreciate you too. I’ll give you a really super brief introduction on who John is and then, John, I’ll let you take it away, but-
John Sullivant:
Sure.
Marc Vila:
… John is in so many words, an expert on financing equipment, which is why you’re listening to this episode. You’re curious about leasing, financing, should you, and a lot of frequently asked questions. So John’s going to be here to answer some of those with me and also just have a little bit of discussion on making good business decisions when it comes to financing. So John, I’m not a big fan on people giving a 20-minute story of their life when it comes to a guest on a podcast-
John Sullivant:
Good.
Marc Vila:
A lot of podcasts do that, but I do think it’s important when you are speaking from authority to talk a little bit about who you are. So just to do the same for myself for people, maybe first time listeners here. My name is Marc Vila and I’m the director of marketing here at ColDesi. We’re in the customization equipment business, and I’ve been in this industry specifically since 2008. So I’ve got a bunch of years of experience in the customization equipment industry, and John has even more experience. So I’m going to let you give us just a little 60-second or so on you.
John Sullivant:
Absolutely. The main thing I want people to know is that I’m an entrepreneur, and that’s what most of your customers are. So I started off actually in decorated apparel as a screen printer and then worked my way up to a trade magazine in the industry. After that, I went to work for a finance company that financed equipment in this and other industries, and from there went on to work for a company called Custom Leasing. Then in April in ’80, I founded Adia Capital and I’m the president of Adia Capital now.
Marc Vila:
Wow. Yeah, that’s very cool journey going from being a screen printer and owner of production business-
John Sullivant:
Yes.
Marc Vila:
… to helping people start and grow their production businesses.
John Sullivant:
Absolutely.
Marc Vila:
So I think you see something from a really different light.
John Sullivant:
Right, and I amended that, of course. I also had time in equipment sales where I sold embroidery equipment. So I know the aspect of embroidery and screen printing from both sides, from helping people start businesses and to running it myself.
Marc Vila:
Yeah, that’s great. Well, if you’re listening out there, you can see that John is the unique wealth of knowledge when it comes to not only this business in and of itself, the customization business in of itself, but the financing side of it too having been doing that, not only working for another company, but owning your own business for a long time too. Now that’s about 15 years, right?
John Sullivant:
Yes, it is.
Marc Vila:
Yeah. Time flies, huh?
John Sullivant:
It does, it absolutely does. But it has been, to quote a cliché, it’s been a lot of fun and we enjoy what we do every day.
Marc Vila:
Yeah. When you started the business, what color was your beard at that point in time?
John Sullivant:
Your color
Marc Vila:
My color. Okay.
John Sullivant:
Yeah. Yeah, definitely not this white, but, yeah.
Marc Vila:
We do post the podcast on YouTube, so if you’re listening to it, awesome. But if you prefer to see us chat, you can check us out on YouTube as well, or on the customapparelstartups.com website. We’ll post the videos on there and such. But to segue way into financing, so financing in general, just broad stroke is an extremely important part of the world economy, and all of us are used to financing things like homes or automobiles or even furniture, right?
John Sullivant:
Sure.
Marc Vila:
Commercial equipment is financed as well, and so are buildings and leasing out spaces and all this stuff. So financing is a really critical part of business as well. But because a lot of new business owners are used to financing cars or houses, there can be a lot of misconceptions when it comes to financing things for your business because you have to think about it differently and it acts a little bit differently I think, as well. So part of this podcast is to help to understand how those lines are different and the benefits of, and I’ll say, just straight up downsides of it too, right?
John Sullivant:
Sure.
Marc Vila:
Because there’s two sides of every coin. So why don’t we just start with a simple question that people ask all the … Or a question that I want to ask you, John-
John Sullivant:
Sure, go right ahead.
Marc Vila:
Generally speaking, why do businesses financing equipment? Why don’t everybody just pay cash or put it on a credit card?
John Sullivant:
Right. Right. Those are certainly options for some people, but most people finance equipment because it is a very large expense. In most cases, since these businesses are being started in a home or in a rented building, it’s their largest expense. So they want to utilize financing to be able to reserve their capital or their credit in the case of credit cards for other expenses that may come up down the road. Another big benefit, which I know we’ll get into, is the tax write-off benefit and the fact that it doesn’t affect our personal credit is debt when you finance certain ways. So some companies do report to you as debt, but here at Adia Capital we don’t. So those are some general reasons why someone would want to finance equivalent as opposed to paying cash. Of course, I can go on and on about that, but I think we’ll have some other questions that’ll come up that’ll relate back to that as well.
Marc Vila:
One of the things that I frequently talked about, I used to sell equipment too, and I used to work for a couple of different banks, the larger one being Wells Fargo. I worked in financing, and I had worked on the retail side of financing. So I had worked with furniture stores and mattress stores and all these little places that when you go buy and you see get your furniture for $99 a month, that’s obviously done through a bank. I had done that kind of stuff through Wells Fargo.
John Sullivant:
Right.
Marc Vila:
So I’ve come into the equipment business, knowing a lot about financing, having done a lot, having done home financing and things of that nature as well.
John Sullivant:
Right. Right.
Marc Vila:
One of the things that we would always talk about to folks when it came to financing anything was the value of having a liquid cash on hand versus not, right?
John Sullivant:
Right.
Marc Vila:
Meaning that some things require quick in and out transactions, so that would be paying for electricity bill, buying supplies, repairing something that just broke.
John Sullivant:
Right.
Marc Vila:
All of these things that happen in real life and in business that having cash on hand or a credit card, I’m going to actually speak of these two things equally, but having the ability to access instant cash is very, very important to success in business. It doesn’t always have to be masses amount, but say you’re wanting to start a business and you decided that you have some money in 401 that you want to borrow from maybe or you’re going to pull out of, you have some stocks you’re going to cash in, you have a savings account you’re pulling out of, you have a credit card that has a little bit of money on it and you’re a small business and you don’t have $100,000 hundred in the bank. You’ve got a reasonably modest amount of money to start a business, probably a four-digit number, right?
John Sullivant:
Right.
Marc Vila:
In that case, if you have say $8,000 or 12 or $15,000 that you decided you’re going to use for this business, if you’re buying a piece of equipment that costs $8,000, for example, you’re using up a huge portion of that liquid money that you have right away.
John Sullivant:
Right.
Marc Vila:
Then when you need to spend cash quickly, now you’re scrambling on how to try to get that versus utilizing the bank’s money-
John Sullivant:
Because you’ve created debt too. Yeah.
Marc Vila:
Yes, you’ve created debt too, right?
John Sullivant:
Right.
Marc Vila:
So versus using money that a bank is willing to give you so you can get started and actually eases a lot of pressure off you when you’ve got emergencies or quick things you’re trying to move on.
John Sullivant:
Absolutely. I couldn’t have said it better. That’s absolutely the truth. The old saying cash is king is absolutely true in business, available cash for when you need it, and not only for when you need it, but to put it to work for you. I know you and I have discussed before the time value of money and basically essentially, the time value of money principle is the bedrock to commercial financing because it clearly lines out how and why you should finance your equipment as opposed to purchasing it. So as a consumer, we hope to only finance things that we simply can’t afford, like a home and a car. Okay? There are times where we finance other things, sure, but we try not to because there’s no benefit to doing it.
The only benefit we get as a consumer is to run off the interest on our home, and that’s it. As a business, it’s just the opposite, like you said, the government or the Fed or the IRS even wants us to buy equipment ’cause that’s how you stimulate a capitalist economy. So they make these write-offs for us that we can take advantage of either an accelerated depreciation like on Schedule 179, which we can talk about or through the term of the loan or the lease. So this enables us to be able to write off 100% according to whatever tax bracket we’re in and expense 100% of the interest. Okay? So we’d depreciate the equipment and we expense the interest.
So if you think about it from that perspective, why would you take your cash and put it into that equipment unless you were so cash heavy and expected some huge windfall or, excuse me some huge situation where you need to hold on or you need to spend that cash because that isn’t going to happen too often. So saving that cash and using financing will allow you to write off 100% against your income tax on your depreciation, expense 100% of the interest and keep your cash in reserve. So that’s why it’s important to do that on the commercial side. On the consumer side, hey, if you can pay cash for it, do it. But on the commercial side, definitely not. A matter of fact, I know many people who can pay cash for equipment many, many, many times over and they always finance it. So why are they doing that?
Marc Vila:
Yeah, and you had said two things there that I think are worth discussing briefly. So one is a concept that I had spoken about many times when I worked for a bank, but the time value of money, ’cause that is actually a term used by people in the finance world or a phrase I should say, used in the finance world. Can you give a brief explanation of what that means, a principle of it to a degree?
John Sullivant:
I certainly can. Before I do so, I’ll tell your listeners, your audience, you can Google it. Simply Google the time value of money and read it for yourself. It simply states that your money is worth more in your pocket today than it is in the bank’s pocket when you’re in 100% write off scenario. Okay?
Marc Vila:
Okay.
John Sullivant:
So that cash, what could you do with that cash? Well, let’s think about it, for example. We have $60,000 and we got to buy $20,000 worth of equipment. We could easily pay for it and have 40 remaining. But why do that? Why don’t wealthy companies do that? Why don’t wealthy people do that? They don’t do it because they know they’re in a write-off situation and they take that money and invest it in their business through marketing or some other way of gaining more customers or gaining more market share or they invest in the market or any number of different things, other businesses. They take that cash and they put it back to work for themselves as opposed to just simply paying off a debt that you’re paying on anyway. Most people when they buy this equipment, hopefully, they’ve talked to an equipment rep about the return on investment so they have an idea as to how much money they can make, and that payment should fit nicely within that ROI. Okay?
Marc Vila:
Mm-hmm.
John Sullivant:
So that should be an accepted expense, that way, that keeps you relevant in your business as far as your equipment goes. You can buy new equipment more often, you can trade it in at the end of a term and get new equipment, that way, ensuring yourself of newer technology and ability and production. Since you know that you’re writing it off and whichever, whichever way you choose to do so, it gives you the peace of mind to know that you shouldn’t have bought it and just paid cash for it and ride the storm out for 20 years on antiquated equipment. That’s just not smart and it’s not feasible in today’s marketplace especially.
Marc Vila:
Yeah. Yeah. That’s an interesting thing to think about too. The first thing that came into mind with it was how, I remember when I was in school, university and further in business and studying business learning that one of the biggest things that is a killer of a small business, especially a startup, is the terms cash flow. So having money to do things, to pay bills, to act on opportunities, and when you lose the flow of cash, meaning that you’ve got too much money going out and not enough coming in during the right times, that’s all timing to a degree, because here at ColDesi, we may have an opportunity to, a company may say, “Hey, do you want to help us build a factory?” Right?
John Sullivant:
Right.
Marc Vila:
We could say, “Sure,” and they’ll say, “Well, it’s going to cost $10 million.” ColDesi may say, “We’re not going to do that.” “Why?” “Well, we’re going to give you $10 million, but it’s going to take us a decade to build a factory,” I’m just fictional scenario, right?
John Sullivant:
Got it.
Marc Vila:
To build a factory and get any of that back. In the meantime, we need that $10 million to buy other things.
John Sullivant:
Absolutely.
Marc Vila:
So moving money around is not just as easy as saying, “I have this much money here today and this much money tomorrow, and that’s profitable.”
John Sullivant:
Right.
Marc Vila:
You have to have money available and it has to be able to move in a timely manner.
John Sullivant:
So you bring up the second point, which is reserve. What we keep in reserve that for whatever, we don’t know what’s coming on the pipeline, so we have to keep money available. We may get a big job and have to buy a ton of soft goods. We may do a number of different things, we have bills creep up, our business may slow down for a moment. Those types of things have to be considered. But even when considering that when you do have positive cashflow and you do have large reserves, it’s still smart to finance equipment predicated simply on the cash is king principle on the time value of money. That keeps you going and it keeps you writing off and it keeps you in new relevant equipment. Okay? We’ve proven time and time again with the equipment, especially at ColDesi sells, the return on investment is there. It’s just there like if that customer has any ability to sell the market, they’re going to be successful.
Marc Vila:
Yeah. Yeah, that’s the great point, and we should definitely dive into some of that.
John Sullivant:
Yeah,
Marc Vila:
I did mention earlier there are two things you said, so I don’t want to forget to say the second one, and that is just how … I’m going to simplify it a lot more than what you said, but taxes is super complicated and most all of us know nothing about it. So it’s important that you have somebody available that can help advise you on that tax stuff and understand it. But one thing that you mentioned that bears truth is that the government, the Fed, the IRS and things of that are nature do offer benefits when you are doing things that help to benefit them or the economy. Right?
John Sullivant:
Absolutely.
Marc Vila:
Therefore, as you mentioned, financing a piece of equipment has different tax benefits that are offered to you as a business owner that aren’t necessarily present there when things are paid with cash. So it’s something that folks can speak with you or your representatives about when they’re financing to learn a bit more-
John Sullivant:
Absolutely.
Marc Vila:
… or, of course, if they have somebody that helps represent them on taxes to understand that.
John Sullivant:
Let me interject here. A lot of times when you’re a small business, you can’t afford a CPA and I understand that, but when you can, they’re almost worth twice what you pay them. With the peace of mind and the understanding, these guys would stay up on top of things pretty much on a monthly basis because these laws changed significantly. Matter of fact, and equipment finance laws changed tremendously, the FASB laws changed in 2022. That’s made quite a bit of work for a lot of the CPAs. So larger companies out there that are taking write-offs need to pay more attention now to how they structure their finance packages, then we certainly can help them with that.
Marc Vila:
That’s great stuff and it’s fascinating and confusing and beneficial and overwhelming. It’s a lot of different things. So hopefully we started off with a lot of information in the beginning in the first 15 minutes of the podcast here, but hopefully, you’ve getting a gist of things. Then let’s break some of these things down and just talk about and get it to the point for if you are a new business, you may not know or understand a lot of this stuff and you realize, “Oh gosh, there’s actually some conversations I need to have,” or, “Maybe it wasn’t as simple as I thought.” You were thinking of it like a car loan where, “Okay, I’m going to borrow $15,000 and it’s going to cost me $300 a month or whatever it is,” right?
John Sullivant:
Right.
Marc Vila:
That’s how you’re thinking about it, and you say, “Well, how much interest am I paying?” then you realize that the answer is a little bit more complicated, which is why speaking to pros like ColDesi that has or that Adia has really help to understand this stuff. But for new business owners, the thing that’s often asked is, can new business owners finance equipment?
John Sullivant:
The answer is absolutely. We have startup programs that facilitate all different types of credits. So generally the question is, “My credit’s here,” or, “My credit’s there,” someone has a lower credit score, they want to know can they be financed? The answer is most certainly, not always, but we have some of the best possible financing for people who could be credit challenged. Then for people who have excellent credit, we have great startup packages for them as well. Of course their questions are always, “What’s the interest rate?” We’re very honest and tell them exactly where they’re going to fall. In commercial lending, it’s a little different than in consumer lending in the sense that a startup business is a little bit more risky for a bank than something that’s been in business for a couple of years or more. So generally, they’ll pay a slightly higher rate than they would if they had time in business, just the understanding of that. It’s still a very good position or a rate to be in and the write-off’s nice.
Marc Vila:
Yes. So essentially, if you’re a new business, in so many words, a bank will take a look at your personal credit reputation and say, “We are willing to let you borrow money for your potential new business under your personal name, because in previous you have paid off some cars and had credit cards and things like that.”
John Sullivant:
Exactly. So it gives them a little bit of a picture or a window into your payment history. With that being said, I wouldn’t let that stop someone who may not have that.
Marc Vila:
Okay.
John Sullivant:
We do have programs that can accommodate people who have very light credit. In some cases, now this isn’t a guaranteed approval, but in some cases, you’ve got deals done that weren’t even scored by the bureaus because there wasn’t enough credit there to review. Okay? In those cases, people will pay a little higher rate, but it does get them in business. The beautiful thing about it is they still can write off the equipment through depreciation, they expense the interest and the return on investment is amazing … So it’s definitely something that it’s not as complicated as people want to make it out to be. It is as easy as an application. Then once we receive the application and it’s reviewed, your Adia representative will get back with you and give you your options and they’ll work with you. They’ll help you get the best possible approval and make you comfortable with it.
Marc Vila:
Yeah, that’s great. That’s great. Working with a company like Adia in general, it’s comforting that you realize you have experts there in the industry who know about all this stuff to help guide folks ’cause a lot of folks come into this a little bit nervous.
John Sullivant:
Right.
Marc Vila:
They’re not sure where to go, so to have somebody educated to help explain things and understand, and like you said, just be honest about it.
John Sullivant:
Absolutely.
Marc Vila:
One of the things that’s a struggle is if you don’t have perfect credit, and the rate is like it’s a relative term, but high, right?
John Sullivant:
Right.
Marc Vila:
It’s a relative term, what is high? But the rate is, quote, unquote, “high.” Should you do it is the question? I don’t know. You don’t necessarily, you have to answer yes on this, ’cause it’s different for everybody.
John Sullivant:
It certainly is.
Marc Vila:
But this is a conversation that’s often had as someone will say, “I got divorced and during the divorce there was a lot of trouble and then that caused my credit score to get hurt. I’ve been trying to rebuild it, but I want to start this business and gosh, I feel like that interest rate is high,” which is a relative term, “so maybe I’m not going to do this.”
John Sullivant:
Right.
Marc Vila:
Right? And that’s a question. So what I would start with, if you don’t mind, and then you can comment further, but-
John Sullivant:
Sure.
Marc Vila:
The thing that I used to always talk about when I ran into that situation, and I was in equipment sales, so my job was to obviously help facilitate the sale of equipment. So I would never just say, “Oh, look, don’t do it then,” right?
John Sullivant:
Right.
Marc Vila:
I would be bad at my job if I said that, but what I’d liked to do, and I still like to do, I think it’s important to ask yourself, do you want to start it or do you not, and what are the risk and reward of that? If you waited a year or two years and built back up your credit, what would’ve happened during that period of time when you didn’t start this business?
John Sullivant:
Right.
Marc Vila:
Is it if your payment is an extra 75 or $100 a month and you waited two years, for one, we have no clue what interest rates will look like, so your payment could end up being flattened the same in two years. If people who didn’t finance equipment two years ago today and they go to do it now, I would gather easily some people’s payments with on the same exact credit could have gone up $100 or 200 bucks a month.
John Sullivant:
Up to three points more, absolutely.
Marc Vila:
Up to three points more, so there’s unknown there. Then the other is, okay, you spent $2,000 more in interest over two years, which by the way, there’s a whole tax side of that, but we’re not even talking about that, how much money would you have made starting your business if you would’ve actually done it today taking a little bit more of a risk knowing you’re paying a little bit more for the money?
John Sullivant:
Right.
Marc Vila:
That’s a question that people need to ask, “Do I do it or not? Do I want to make it happen today or do I want to wait?” I would always say, “Don’t let an interest rate, a number that feels more hurtful to your pride I think than anything, be the stopper. If it means you can’t finance the equipment or you can’t start, that’s one thing. But if it means that I have to start with a payment of 350 instead of two 50 is $100 a month in a business that could make you $10,000 a month worth stopping?” It’s a challenge to get past that thought process, and I think pride is a part of it and also, the idea of that $2,000 extra in interest. So I don’t have a question, but what comments further do you have on that?
John Sullivant:
Well, I think you’ve laid it out very well. I think it is imperative that people think through that because any new business that you start in some way is a gamble. You’re taking a gamble that you can make money doing this and you’re laying out time and money to do it. With that being said, your point about interest is absolutely true. I can almost show you if someone paid $200 a month for this equipment and someone paid $600 a month for the same equipment, I still would go into business if I was a $600 person. The reason is, is that I understand clearly the return on investment. I know what my personal strengths are in a business and how I can help that business grow in marketing and sales, so that wouldn’t stop me. I understand that I’m expensing 100% of that interest anyway, so it doesn’t have the connotation, but it doesn’t say if I’m a consumer. If someone gets a home loan at 2 1/2% and then someone gets one at 10%, well, that’s a huge difference?
Marc Vila:
Right.
John Sullivant:
It is something that you have to budget for. Within what we’re talking about, usually the return investment in most cases within 60 to 90 days is there. So they’re going to be making the money to make that payment easily well within a couple of days, much less the entire month. You’re right, it’s the pride issue sometimes, or we’re still inundated with mortgage rates that we think everything is a mortgage rate or a car payment rate, so like a credit union or something like that, and that’s just not the case. Businesses are always going to pay slightly higher interest because banks want to make sure that they’re protecting their investments. They protect their investments through hedges and yields. So that’s pretty much what it breaks down to. So I would never let an approval that is more than what I want it to be, stop me from going into business. Now, if I could better that approval, absolutely.
Marc Vila:
Right.
John Sullivant:
But if I couldn’t, then I definitely would take what was on the table and move forward.
Marc Vila:
One of the things to consider in a lot of these things is the risk to the bank in general, which is something that I learned a lot about when I worked for a bank and we had to take courses and certifications on this in fact. But one of the things they talk about is why that home loan is so much different. Even an auto loan is so much different. The home is the lowest interest rate in general, generally speaking. Now there’s 0% credit cards, but generally speaking, those aren’t 0% forever. There’s always catches and hooks and things like that, and there’s ways they get around that. But when we’re talking about payment financing where you’re going to buy something for a dollar amount, they’re going to give you a certain number of payments for a certain dollar amount, and then essentially, you own it afterwards, a house for one over time, generally speaking, real estate goes up over the long term.
John Sullivant:
Absolutely.
Marc Vila:
So banks know that their investment is reasonably safe over a long period of time. Two, your house is probably not going anywhere. So if you don’t make your payments, it’s very easy for the, not in so many words, but for the bank to tell the court and the court to tell the sheriff’s office and the sheriff’s office to deliver you a letter that the house is now the bank’s.
John Sullivant:
Bank’s, right?
Marc Vila:
When you’re financing other things that exist in this world, including a piece of equipment, it’s not as easy for a bank to just say, “Give me back the embroidery machine, I’ll just go sell it again,” or something to that effect, which is much different than a house. A house is, it’s reasonably easy for a bank to say, “Give me the house and sell it again,” and to oversimplify things. But that’s the concept, and I think people can understand that. That’s why there is. Also, when it comes to your hierarchy and life, shelter is one of the base pieces of hierarchy, right? It’s like air, water, food, shelter. So your home is probably one of the main things you’re going to put money into if you have to, where the fourth printer you’re buying for your business is significantly higher on that hierarchy of life, and the bank knows that. So that’s a different risk level than your house.
John Sullivant:
Yes, it is. We let people know, again, that we’re intertwining commercial and consumer, but to make it relatable, and I understand that, absolutely. But the principles and the rules that govern how commercial lending works versus consumer lending are way different. Then of course the benefits are way different. But to agree with you completely that a home, yes, and it’s easy to lend money on a home, most times they appreciate, ’08, ’09 is an exception, but most times we see appreciation in homes. They’re a safe bet for the bank. They don’t overextend themselves the way they did in the past sometimes on banks with seconds and things like that as far as homes go. As far as cars go, they’re so movable. They’re so resellable that it makes it an easier situation.
Of course, you’re still taking a huge hit when you buy a car. We all know that. But as a business, as a commercial loan, that’s the difference. That’s a sweet spot because we don’t have to think of it as a consumer. We’re thinking of it as a commercial deal, a commercial business, a commercial agreement where someone’s lending us money to get the equipment we need to make money, okay? As we make a cash asset, we’re creating a tax liability and the IRS lets us write it off according to whatever … You talk to your CPA, but it’s according to whatever tax bracket you’re in and then it’s … and the interest.
So it is a way that you can go into business and continue to thrive in business with the write-off and the potential to buy more equipment and enhance your business to create more capital. So they are relatable, but I always say, I’ll always borrow money on the commercial side, Marc. I rarely borrow money on the consumer side and then my credit cards, I try to keep them as low rate as possible. But I know I don’t want revolving debt because revolving debt hurts my ability to negotiate deals with banks and things like that. As a small business, revolving debt hurts your ability in negotiating with companies like mine because you’ve got too much revolving debt and banks don’t want to lend your money.
Marc Vila:
Right.
John Sullivant:
So it’s important to keep that revolving debt as low as possible.
Marc Vila:
So for those listening, then-
John Sullivant:
Credit card debt.
Marc Vila:
… maybe are not finance heavy, so revolving debt, and the reason why it’s called revolving debt or credit card debt is you have installment debt, which means that you borrowed $10,000. As you pay it off, that number essentially always goes down. So you start with 10, you end at zero.
John Sullivant:
Yes.
Marc Vila:
Right? Revolving debt is you are given $10,000 to spend or not, and you can spend $10,000 and then pay it off next month, you cannot spend any of it and then in the month 11, borrow $10,000 and then have that debt indefinitely because revolving debt does not require it to be paid off in a certain period of time.
John Sullivant:
Absolutely.
Marc Vila:
So it is a higher risk debt because most of the time you don’t hear about friends or family saying, “I owe so many car loans that I’m never going to get out of them,” ’cause that’s not typically the case. Eventually, if you keep making the payment, it’s done whether you’re happy with it or not. The credit card debt, if you keep making the payment on it it doesn’t necessarily make it go away. You have to actually pay higher than the payment and not be tempted to reborrow because it’s revolving. You can then reborrow that so it hurts your buying power having revolving debt, which goes into, one of the things we were going to talk about in our notes here is, why not just use the credit card? If somebody says, “Well, I have a credit card that has a 4% interest rate on it, and I have a $15,000 line of credit and this machine is $10,000, should I do that?” Why is financing something commercially different?
John Sullivant:
That’s an interesting question. If someone had a credit card that had the limit to buy this type of equipment at a 4% rate, right now, I’d probably do that. I probably would incur the revolving debt or the credit card debt because that’s a super low rate, especially for a new business.
Marc Vila:
Okay.
John Sullivant:
But seldom is that the case.
Marc Vila:
Okay.
John Sullivant:
Most credit cards are going to be way higher than 4%. Some have 0% offers. I have a credit card right now through I think Bank of the West has 0% for 18 months or something like that. I’m going to take advantage of that if I need to, but I’m not buying equipment that I can’t pay off in 18 months. Most people can’t pay this off that quickly. So they’re creating revolving debt here again, and the reason revolving debt is the big no-no is because it’s unsecured. So there’s nothing there that the banks can go and get back, and so that’s why, “Hey, they’re real heavy on their revolving debt. We’re a little uncomfortable,” credit analysts will say, “because they have so much revolving debt.” If you go and buy equipment through revolving debt and you need to buy more equipment or finance something else for your business, that could hinder you in being able to do that.
Marc Vila:
Yeah.
John Sullivant:
Yeah.
Marc Vila:
So that actually makes sense.
John Sullivant:
Yeah. Now look, using a charge card like American Express used to be to buy your soft goods once a month, that’s smart, float it for 30 days. But other than that, I wouldn’t use a credit card for my business for anything that I couldn’t pay off within 30 days unless the rate was so low it made sense.
Marc Vila:
Right. Right. So there’s a case-by-case scenario to be made that sometimes it could make sense if you have a very particular low interest rate, and even if you said a financing something, you could get a very fast return on your investment on equipment. If you put it on a credit card. You very well can, if you work at this business, and it’s something we talk about all the time. But the one thing that’s very important is then you have to pay it off. So part of it is the discipline of paying it off because it’s very easy to be caught in a trap of, “I’m going to catch it next month. I got a really big opportunity this month, I’m going to catch it next month.” The next thing, the 18 months go by and then now the interest accrues and then they tack it on typically-
John Sullivant:
Absolutely.
Marc Vila:
… because if you don’t pay the debt, then you have to pay all the interest. All of a sudden your balance goes up like two grand in a snap.
John Sullivant:
Right. Yes, it happens.
Marc Vila:
So it’s a dangerous game to play. If you’re really good at the stuff and you’re very smart with it and you’re very experienced, you may not even be listening to this podcast, this podcast probably is for a lot of folks who are looking for the education on this stuff.
John Sullivant:
Right. Right.
Marc Vila:
So it’s a dangerous game to play. I always say if you’re looking to take the risk and take the jump, because anytime you open up a business is a risk or a jump, then the people who have a success in business, folks who are gurus, entrepreneur gurus, coaches, stuff like that, they consistently will say, “The only people who win are the people who take the leap.” So if you have the opportunity and you can jump on it and you take the leap, that’s your opportunity to win. I don’t think there’s a clear answer on any of it, is interest bad?
John Sullivant:
It’s case-by-case.
Marc Vila:
And all that stuff.
John Sullivant:
Right. Right. I know one thing that I read some information one time of some people who were highly successful entrepreneurs and just like this topic, nothing was the same path for everyone. Each individual had a different road that they were on. The one consensus was when they had an idea to take swift and immediate action, that’s what they could pretty much all agree on.
Marc Vila:
Okay.
John Sullivant:
Certainly, ColDesi partnered with Adia Capital can facilitate that in this situation to the best of our ability. Get them equipment as soon as possible, get them trained, get them a good finance package, allow them to put their plan into action ASAP.
Marc Vila:
Yep. Now I have a trick question, maybe.
John Sullivant:
Okay.
Marc Vila:
I wrote this down because I remember hearing this on a finance podcast a while back. I think we spoke about it, so I don’t want to reiterate the same answers again, but I want to say it just because it entertains me to say this, but isn’t debt for suckers? Isn’t having debt bad? Isn’t that what Dave Ramsey and a lot of these famous gurus would say is that any debt that you have as bad, biblically, debt is bad. So why isn’t this type of debt bad? I know you spoke about it already, but maybe we could just reiterate it in a different way.
John Sullivant:
Yeah. Yeah, and I agree with debt being bad in certain situations. We’ve already talked about people have too much debt, can’t get loans sometimes. As a consumer debt is bad because there’s no real write-off advantage to taking on that debt. You’re simply able to use something that you either need or want. Commercially speaking, that couldn’t be further from the truths. Also in life principle thinking it also couldn’t be further from the truth. I appreciate Dave Ramsey and his daughter and all that they’ve done, and I certainly appreciate the biblical aspect of debt. But when it comes to modern-day capitalism and understanding money, there are people who’s net worth is so many millions of dollars it’s unfathomable who got there on solely on debt. They built their empire through debt, banks throwing low-rate money at them, allowing them to buy assets that appreciate. Then they turn around and take that appreciation back out of that debt with more debt.
They keep facilitating those debt programs through different types of investments over and over and over again to the point to where, financially speaking, they could become liquid whenever they wanted to at several million dollars and generally start off with very little instead of understanding how to make debt work for you. That’s the thing. Debt is credit, that’s what it is. So you have to understand what you’re doing. Most of us, people like you and I, we’re taught “Don’t finance anything you don’t have to,” and, “Debt is bad and it’s for suckers.” Well, these suckers are multi multi-millionaires and they’ve figured out how to use debt for their advantage. So no, debt does not make you a sucker. If I’d be so free to say that type of mentality can be restrictive when it comes to business growth.
Marc Vila:
Yeah.
John Sullivant:
That being said, let me say this, I see about eight, maybe not even eight, 6% of people that I talked to even over the years that I’ve been doing this where I see they’re in a situation where they should pay cash. Okay?
Marc Vila:
Yeah.
John Sullivant:
I never see a situation where they should use a credit card outside of a super, super low rate.
Marc Vila:
Right.
John Sullivant:
So it’s always smarter to finance something at an agreed upon rate and go that way. That’s always the smart play is to create that debt commercially because there’s ways to write it off and then we can build relationship and build more debt, which is creating more cash asset, right?
Marc Vila:
Mm-hmm.
John Sullivant:
That debt is helping us facilitate the tax liability, if that makes sense. When you make money, you owe taxes. Okay?
Marc Vila:
Okay. Right.
John Sullivant:
If you’ve never been in business before and you make $1.00 And you thought you made $1.00, guess what? You make $.70 pretty much. So you have to understand tax debt that comes along. Most people who started a new business, they’re used to working on a W-2 and they don’t understand that those taxes have to be paid and that they have to pay them. No employer is going to hold it out for them. They’re responsible to reporting their income to the IRS on a quarterly basis. This is something they consult a CPA about. I like to say this, at the end of the day you have to live with yourself, and most of us can get inside of our heads pretty quick.
If you are so ingrained with paying cash and getting debt paid off so fast that it gives you a sense almost of euphoria, then I suggest you stick to it. Don’t make yourself miserable because I can show you a thousand ways to Sunday you how it’s the right thing to do. But if you don’t believe it is and you can’t convince yourself it is or open yourself up to the knowledge that it is, then don’t do it.
Marc Vila:
Right. Right. One point that I think is important is, it is a decision between you and your business partner or your spouse or whoever is involved in this situation for you.
John Sullivant:
Absolutely. Yes.
Marc Vila:
One of the problems that I’ve seen in consulting businesses with marketing and doing marketing myself, having been a business owner myself, having lots of really good friends who are entrepreneurs, is that when you make these decisions, all the people that I know, a few really good friends that are successful in their businesses and have had businesses for 20, 30, 40 years, they have similar mantras that have been said over time because I ask these questions all the time because we have a podcast. So I’m always looking for topics and interest and ask questions all the time.
John Sullivant:
Sure.
Marc Vila:
One of the things that is consistent is that I don’t let other people’s opinions or image of me or the decisions that I’m going to make influence it. Meaning that I don’t make business decisions for vanity. I don’t make business decisions based on, somebody might think it’s shameful to borrow money. You have a really good friend who’s very anti-debt, and they think it’s shameful to borrow money to a degree. Well, this is not their business. Then when I say that it’s not their business, I mean it literally and figuratively. They don’t own the business you do, and it’s none of their business on how you handle your finances because they may have a completely different financial situation in their bank and their home life and their business than you do, so you have to operate differently. So I think some pride comes into it, some self-reliance comes into it, some self-actualization. There’s a lot. When you’re looking to start a business, if you’re not sure what to do and you are unsure about debt, but you do know what the goal is ahead of time, right?
John Sullivant:
Right.
Marc Vila:
That’s when you contact folks like pros at ColDesi, and folks like John and the team over at Adia, and you start having conversations about this with experts. Then you and your business partner or your spouse or whoever is involved, talk about that together. It doesn’t matter if you have a friend who said, “I financed everything for my business and the bank paid me money to borrow them.” It’s like it doesn’t matter what those stories are because many of them may not be completely true on paper and also, it’s not their business. So I just think it’s really important to go into it yourself. One of my good friends had said to me something to the effect of that he knew somebody who worked in this finance industry that they were in, they do 401ks and a lot of that stuff, personal finance type of stuff.
He had a friend that was opening up his own branch of this finance thing. Because of views of people, of his peers and hiring people and how you should hire employees and pay people, he ended up quitting ’cause he had an idea that he wanted to do. He said, “You know what? All these people are telling me that this isn’t the right way to do things and that I shouldn’t do it that way and it’s a bad idea,” so he quit. So a bunch of years later, my friend started doing what he said. He called it, he’s like, “I’m going to do what you said you were going to do.” He’s like, “Everyone says it’s a bad idea.” He’s like, “But it’s a good idea.” He’s like, “Those guys, they’re in a big circle. They live together in this bubble,” so he did it and the guy has got a million-dollar house now.
John Sullivant:
Yeah. Yeah. Yeah, go ahead. Go ahead and finish, please. I love it.
Marc Vila:
Oh, yeah. So I think just the moral of the story is is that what he did was, and it was the story he told me, he’s like, “I talked to people who were in other industries. I talked to experts in my industry and I didn’t let influence of false friends let me decide what I was going to do with my business because it was mine.” He said, “I wouldn’t have achieved success like my other friend who just didn’t achieve success because of this poor influence and poor education on things,” because when he got actually educated on it, he’s like, “Wait a minute, if I pay people … ” It was like a commission versus draw, all that type of stuff, and it doesn’t matter the details.
But he said, “Actually, when I started investigating, there was lots of industries that paid people this way and they grew faster and the people made more money and they were able to share wealth a lot better. It turned out to be really well if you worked with the right people.” So I think the moral of that story is education yourself is number one. Making the decision for yourself is number one, understanding everything, all the terms and realizing that and not letting pride or people around you necessarily influence you when they shouldn’t be influencing you. It doesn’t mean don’t take advice from friends, that’s not the point. But I’m just saying that not everybody knows everything and you got to do your best.
John Sullivant:
Absolutely. I love that point, and I’m absolutely with you 110% on that. Over the years of my life, I’m 58 now, that’s always born out to be true. It always shocks me when people go along with groupthink, whether it’s over something like sports or one thing on day is absolutely taboo. The next day, “Oh, why didn’t we do this?” Change their mind. So when you go along with a groupthink sometimes it keeps you from accelerating your life or your past in a way that could be more financially beneficial for you, so take your path. Usually, what I tell people, “What’s in your gut? If it’s in your gut to start this business, then do it.” If you don’t want to start this business because you’re scared, don’t let that stop you. In other words, don’t let fear stop you. But if you have a calculated understanding of why you shouldn’t, then that’s fine, but don’t let fear stop you and don’t let time stop you. Be on top of it, get it started and get it moving. That’s the way to succeed. If you never start, you can never succeed.
Marc Vila:
Yeah. No, this was great, John. I love talking to you about this stuff because, well, for one, it reminds me of days of old when I used to work in financing and I learned a lot and I worked really hard, and that brought me to where I am today. I think it’s important to continue to discuss these things out in the open and educate them and let people know that resources like Adia Capital are there not to convince you to buy something, but to help these folks make the right decision on, like you said, hey, if somebody has a crazy low credit card and that bank is taking that risk, sometimes I’ll tell them to do it.
John Sullivant:
Absolutely.
Marc Vila:
Like you said, it’s rare, but you know when it’s right, and sometimes you know when the right decision is to pay cash. So when they know they can talk to somebody who’s going to help to guide them in the right direction and also properly say, “Here’s A, here’s B, here’s the facts,” guess what? You get to decide which is the best thing about owning your own business.
John Sullivant:
Man, I couldn’t agree with you more.
Marc Vila:
Yeah. So this is not going to be the last time we have you on the podcast. I hope we have you on more, and we can dive into very some specific topics. So if you out there listening, have some real specific questions about financing, you can just send them over to marketing@ColDesi.com, and that’ll come right to me, Marc Vila. Then I can pass those to John or back and forth, or maybe just some of these questions will come in and it’ll inspire a very specific podcast just on that topic. So I may reply and just say, “Hey, you know what? That sounds like a great podcast just for John to talk about that one topic.” So thank you again, and if you-
John Sullivant:
Thank you.
Marc Vila:
I’m going to put a link in the podcast notes on customapparelstartups.com that’ll link to a page on the ColDesi site that’ll talk a lot about Adia and financing and things of that nature. If you reach out through that link, you can chat with our pros and even get John or someone on his team on the phone to directly discuss financing your business.
John Sullivant:
I’m certainly happy to help. Absolutely.
Marc Vila:
Yeah. Excellent. Well, thank you all. This has been Marc Vila from ColDesi and our wonderful guest, John Sullivant from Adia Capital.
John Sullivant:
Thank you, Marc.