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On LawnSite.com, the online discussion forum, (and part of the Turf family) a participant asked: “How much debt do you think is OK? The first three years I only carried a $500 monthly truck payment. I decided to add $90,000 in payments over five years on a new one ton and mini excavator. I feel OK with the payments since we will do over $400,000 with four laborers total and about $250-270 gross profit or so, but I’m wondering if I am at my max debt now?”

California

Here’s what respondents had to say (edited for content and clarity):

“Some people don’t want debt; some use it to their advantage. As long as you can keep money going out with production coming in, I see debt as a tool. We’ve gotten four new trucks in the last six years. It will be tight this year, although a PPP loan has helped. The thing is, with this debt, I don’t think we’ll be paying anything in federal taxes for at least five years. We also have not had one truck break down this year—one of the perks of newer equipment. We reinvest almost all our money each season.”

“I stay below 25% of gross.”

“I have far more [debt] than I am comfortable with. But to be comfortable, I would have zero. I tried that for several years and spent WAY too much money fixing trucks and mowers. I wasn’t comfortable with that either, especially after my accountant politely told me I was being an idiot by running trucks into the ground and constantly fixing them. He was right.”

“Downtime KILLS productivity, as well as employee morale. I started having a backup plan for when a truck breaks down, so employees can hop in a pickup and do other work. Luckily, we haven’t had that happen, but it will. Also, the smile you get from an employee when they find out they’ll be using a new truck is priceless. It definitely helps with morale.”

“When I was younger I thought the bank would tell me when I reached my limit; they would just reject me. I was wrong. Keep as little in debt as you can when you’re small.”

“We use debt to finance growth and manage cash flow. When structured correctly the use of someone else’s money allows your capital to remain available for other uses, such as payroll, investments, savings, and more. I try to follow a couple of rules:

  • Generally, we contribute about 25-35% as a down payment to have skin in the game. It helps to keep the loan to value analysis in a safe condition. That is, we rarely, if ever, owe more on something than it’s worth, even as it ages. This also keeps you in good shape with banks, which typically have higher standards than vendors.
  • Manufacturer financing is usually easier to get. It’s as if they just want you to spend, spend, spend. We compare bank rates and terms to specialized finance companies and also to vendor credit companies. The manufacturer’s credit arm doesn’t really care about the loan to value like a bank. They care about closing the deal.
  • Depreciation is your friend. We work to lower our tax liability by using accelerated depreciation when we can. Figure out how to depreciate items and how it affects tax liability. Check with an accountant.
  • Debt and management of debt helps us keep employees satisfied. One senior employee is on his 5th or 6th new truck. It keeps morale high when new stuff is rotated in. Employees don’t want to be fixing stuff every day; they want to do their jobs.

If we had to pay up front for everything, it would take forever to afford. Debt allows it to be scheduled and budgeted. Figure out a business plan with goals (five years plus and updated annually), then map out your budget with cash flow. Factor in debt and you’ll be able to determine what you can afford. Additionally, you can project payroll for yourself and staff. Without the analysis and plan, debt is just borrowing money.

Also: While interest is an expense, paying off loan principal, making a down payment, or paying in full only comes from profit—which means it’s subject to income tax. The concept here again goes to depreciation, the expense portion of a purchase. Choose the depreciation schedule which mostly matches your payment plan or tax strategy and you’ll have less of a tax liability while enjoying the new asset.”

“I’ve seen too many guys save and pay for everything in cash. Then they have little to nothing in the bank when tough times arrive. If you can use debt to build income and growth, go for it but be wise.”

“We’ve been financing all equipment purchases for the last few years. We used to pay cash for everything. That kept my partner and I comfortable. As we’ve grown, we’ve realized financing at low to no interest has helped us grow quicker. We tend to pay most things off with a single season. Right now, we have about $1,500 in monthly payments. Almost all at 0%. It’s easily manageable, plus we could pay it all off tomorrow if we needed. Anything we carry over the off-season has money set aside to pay it.”

“One thing my accountant pointed out (and he is conservative) is when we were running trucks and equipment into the ground, we were spending as much on repairs as payments would have been. These were direct costs we tracked not including labor (if done in house), lost time, etc. The morale part is not measurable, but it’s there. Guys get sick of unreliable equipment. They might not come out and say it, but they’re thinking it. I believe it’s my responsibility to provide them with the best equipment/tools I can afford to make them as productive as possible.”

Click here for the full discussion.