Debt as a barrier? (Student and other)

I'm curious on how folks feel about the relationship between past debt (student and other) and the start-up of a new "regenerative enterprise". I'd be interested to hear from those on both sides... people who have focused on minimizing debt before beginning a business or those who jumped right into their venture without the reduction of prior debt, focusing on elimination later as the business matures and provides a viable income..... thoughts? Basically how much of a barrier do you see these fiscal obligations as?

^ I know the nuances are infinite ($500.00 vs $100K of debt, proposed business, time to profitability, etc.) and like most other questions in permaculture ..."it depends"... but I'm curious in a general sense.

Luke, my financial strategy is simple. I have my wife and two sons and myself living with my folks. I own a home but I am renting it out. I work full time and as much overtime as possible. So, now I am paying off bad debts first, while saving for land at the same time. Bad debts = credit card, cars, basically anything that isn't a school loan or mortgage.

Right now this is what I look like financially:

Cars are paid off (two vans Honda Odyssey and 1991 Chevy 1 Ton Conversion van)
$30,000 in school loans
$3,000 in credit card debt.
$127,000 in mortgage debt.

The house is being rented to own. So the biggest chunk of my debt will be gone in 6 months when they buy the house, but someone else is paying the mortgage already!

So I am able to save $1500 a month while making minimum payments on school loans, no 401k contributions, and the credit card will be paid off by the end of next month.

So.....all I will have basically is $30,000 in school loans, daily cost of living expenses, and saving for land.

I will not have my school loans paid off before I buy land. This is intentional. Because most banks will not loan you any money for land unless you have 20% down. If I pay off the school loans first I won't have a down payment for land. So we want to have more than 20% down when we buy. $18,000 savings in 1 year is 20% of $90,000. I don't plan on spending that much on land. So we will probably be putting 30%-40% down on the land. Which is awesome. Then we will live with my parents for another year while we build a temporary structure (probably CMU foundation with post and beam or tiny log house) to move into while we get the permaculture stuff going. Then over the next couple years we will build the real house and turn the temporary one into a shop or garage of some sort. Maybe a processing/canning house.

Its not easy, but it'll be worth it. My plan is to be doing permaculture on my own land by 30 years old. Then by 40 years old or sooner be able to quit my job and tinker on the farm for another 40 years or so before I die.

we chose to get out of as much debt as possible BEFORE starting our business.
we recognized there would be lots of start up costs and didnt want to have to choose where we wanted to put the money.


being debt free (except mortgage) also gives a sense of freedom that is hard to explain. i know it has made us feel like we can do anything, and we have acted accordingly. so far so good.

we also dont have student loans, so our debt wasnt as large as some.

imo - its better to be debt free and no business, than to be in debt and have a successful business that is mortgaged. imo it makes you more resilient.

Another option is partnering up with other permies to buy land. I have another permie that I work with that might go in on land with me. That effectively can reduce our land debt by 1/2.

I think patience and hard work and not expecting it to be given to you is what is going to make it happen. That's how everything in my life has always worked.

I think your really need to distinguish between "good debts" and "bad debts". Pretty simply, good debts make your richer while bad ones make your poorer. Working out which is which is a long way towards being financially secure.

If I borrow money for a car, that debt makes me poorer month to month. Plus the car itself loses value over time. = Bad debt

If I borrow £50,000 for some farm land I might make no income on it for 5 years - I can live as frugally as I like and still be worse off month to month. This would be a bad debt.
However if I borrow £70,000 for the same farm land and use £20,000 of it quickly setup a viable business which generates income from that land within 12 months then I'm better off. While I'm actually deeper in debt I have a sensible business plan and a clear path to paying that money off... greater debt is not necessarily a bad thing, depending on what it is used for.


Also, I know that some people feel guilty about having debt. I think it is worth reminding folks from time to time that debt is what fund peoples pensions and the like. Someone who has cash they can't use effectively lends it to someone who can make good use of it both parties are better off.

In finance/investing circles, they use the word 'leverage' instead of debt.

A lever is a multiplier, both physically and financially. A physical lever, it can multiply the force your apply to it (like a screwdriver on a paint can lid) or your speed (like driving a golf ball) and it always works the same, regardless of which direction you're going. You could press the paint can lid on just the same as you could pry it off, and you can hit a golf ball backwards just as fast as forwards.

That's why it's a great metaphor for debt. Borrowed money is multiply effective. Both good effects and bad.



Consider this. You have $1,000. You spend it on ice cream, and sell the ice cream for four times what you paid. You started with $1,000 and ended up with $4,000. You can calculate the profit there, right? $3,000?

Now consider this. You have $1,000. You spend it one ice cream. There's a power outage the day before you plan to sell the ice cream and it's all ruined. You lost your $1,000. You're broke. You have $0.

That's how business works with no leverage. You could earn a profit, or you could lose everything.



Now, with leverage multiplying things. You have $1,000. You work out a credit arrangement with your distributor and buy $10,000 worth of icecream. You sell it for $40,000, enough to pay off the loan and have $20,000 more than you started with. $20,000 profit; yay leverage! Same starting money, same business venture, six times more profit!

Except, now when there's a power outage, what happens? You have no ice cream, and your $1,000 just turned into -$9,000. Ouch. Same starting money, same business venture, ten times bigger loss.

Doing business with leverage can mean earning bigger profits, but can also mean losing BOTH the money you have AND the money you have to earn in the future.



So, yes, there are clear "bad kinds of debt" to avoid. But I'm not positive that "good debts" is an appropriate name for the other kind. Maybe call them "risky debts" or "chance debts" or "speculative debts" or "adventure debts."

In my case, I'm the income source for five of us. My risk tolerance is very, very low, and there's basically no debt that's a good debt in my situation. Your situation and your risk tolerance might be different.

Ask yourself, "What's the worst that could happen?" and then,
"Could I stand that?"

If yes, go ahead and borrow it.

GREAT ADVICE MIKE. But its always better to NOT borrow and make a profit with your cash. You stand to loose your cash still, but at least you don't owe anyone anything.

Whether you pay down all your debts or not before starting up something new, make sure that you are paying all your existing debts according to schedule, and that you have a plan in place for being able to continue to make those payments during the business start-up phase... in addition to paying for all the expenses of living your life and starting the new venture!

Even if you're not curious about this for yourself, business partners, banks, and other potential partners and investors might wonder how you are going to manage the venture's finances if you're not on top of your own. Again, if only for yourself, you'll want to demonstrate your ability to plan and budget long before you commit to starting a new business.

Meanwhile... starting a new business will inevitably involve costs, and for the most part, you're going to have to pay most of the initial costs out of your own pocket. I'd be surprised to hear if anyone regretted getting out of debt and building savings prior to starting a new venture! And when it comes to finding investors, they'll be more likely to take a risk on you if they know you are personally invested, and with cash in addition to sweat.

A general rule of thumb is that the more debt you are carrying, the harder it will be to get any more. Another reason to pay off as many debt as possible before you think you might need to take out any loans or lines of credit for your business, either to buy land or to take advantage of leverage as has already been described.

Your personal credit situation will very much affect your ability to borrow money for your business later on, which you may very well want to do at some point in its trajectory. A low credit score (OR a lack of credit history! Yes, we get penalized in the more traditional financial system for never having gone into debt in the first place) can either reduce your chances of getting a loan (or a line of credit, or a credit card) at all... and if you can access debt, you may pay a lot more for it in terms of higher interest rates if your credit score is lower.

There are several things you can do to improve your credit score (you can Google them up so I won't go into them here). But I HIGHLY RECOMMEND that you check your credit report to see if there are any inaccuracies on it! In the US, visit this site to order a free copy from all three credit agencies. You might be surprised at what you find there, and it can take a while to correct any errors.

-Elizabeth

I guess I'm a little different than some who have posted. I don't have debt aside from mortgage debt which is relatively reasonable. I'm perhaps with many of you in that I'm paranoid about accruing more debt! I'm really interested in this upcoming class because the hardest part for me is the jump/purchase. I currently own a business that requires my presence 5 days a week. If I buy land it really needs to be for my primary residence in that I am scared to death of taking on debt for an unknown outcome and worst case scenario I'm hoping to have my 'farm' mortgage be liquid with my current income. I want to hear from people who have planned a 10-20 acre farm under the guise of regenerative ag. I'm going to this workshop "October 9-11th, Minerva, OH: First of a three part series: Design Certification in Restoration Agriculture" with Mark Sheperd and possible the Regenerative Farm Enterprise Planning week in Afton, VA. I'm more on the ocd business side of things when it comes to planning (my hypothetical farm already has a planned planting map). Since there is a great deal of vagueness in any business plan I'm hoping to find experiences with people that have made it work or not.

Ray Cecil Iii wrote:GREAT ADVICE MIKE. But its always better to NOT borrow and make a profit with your cash. You stand to loose your cash still, but at least you don't owe anyone anything.

A friend of mine has started a business in the past 12 months. She started trading (via amazon and ebay) with minimal stock which she had saved to purchase. Shortage of capital for stock was holding her back. She borrowed £10,000 from family (having first proved the potential of the business with her own cash and time) and now has a business with projected turnover of over £90,000 per year. It would have taken her well over 12 months of saving to build up to the capital state she is at now, and is on the verge of making a good wage (she still has her full time day job).

I don't know the ins and outs of her project but something that previously paid pizza money now pay her mortgage.

Key here is that she had proved the concept, had a clearly defined purpose for the cash (web development and stock purchase) and borrowed what she needed and no more. Now that may be outside your personal risk tolerances but I would say she had the risks well in hand, and still had the income from her day job if everything failed.

There are probably a few businesses you can start where it is ok to have debt. One example I can think of that worked for us was to purchase a semi-truck and to start our own trucking company. The debt we had made no difference except we were in good standing and not maxed out so we were able to get a loan for a truck. My husband then leased onto a company that provided the loads. We made money until he became very sick and lost it all.

Because I was always afraid of debt, I saved and paid off all other debt. We were lucky that we were able to sell off all our equipment for what we owed so we ended up with a business for 20+ years and no debt when we lost it all.

If I were to start another business or heck, even if I bought a truck again, I would not have debt. I would have at least a years worth of bills in savings. Most people fail in their businesses because of debt and not having enough money banked to pay the bills until their business takes off. This would be the same if you purchased land and wanted to start a permaculture business. You will not only have living expenses but start up costs as well. I guess if you were lucky you could get the land and work for someone else while getting your business going. It all depends on the amount of energy you have. The problem arises if you become sick or injured and could not work...again a reason to have money in the bank and no debt.

I am sure I may be extra cautious compared to most but I have had a thriving business and lost it in a second. Would I do it again, probably because we got lucky for so many years. It would depend on what the business was I would have to say.

Kim and Micheal,
Both great points. I think there are health benefits that come along with having no debt. Well.....some people have no problem with debt hanging over their head. Some people can't stand it. I'm one that can't stand it. Especially after all the hard work I do for a living and the government, bank interest and bills take sooooo much of it. Reducing debt before venturing into a business cannot be a bad thing.

My wife and I have been pondering making a small "tiny home" from cob or earth bags on our land once we get settled on it. We were thinking of letting people live there while they saved money to start their own permaculture farm. Can you imagine how many more people could get ahead and start farms if we all had the chance to live rent free for 1 or 2 years? If everone let just two or three families live on their farm for two years each, then those familes did the same on their farm, think about how fast the debt free movement could get going!! I'm living rent free with my folks and it is allowing us to save to realize our dreams. I really want to help others do the same one day.

Michael Cox wrote: Shortage of capital for stock was holding her back. She borrowed £10,000 from family (having first proved the potential of the business with her own cash and time) <...>
Key here is that she had proved the concept, had a clearly defined purpose for the cash (web development and stock purchase) and borrowed what she needed and no more. <...> I would say she had the risks well in hand, and still had the income from her day job if everything failed.

Yep, I agree 100%. Totally appropriate use of leverage. When you grow into the need that way, it's not so speculative. You've got your customers, you've got your system, you've tested it all... there's no guarantees in life, but that's as close as you can hope for.

In addition, if she's got her day job, the downside, if the business should implode, is tolerable. She owes some family members £10,000. She'll need to repay them, but they're unlikely to repossess her car (for example). Tolerable.

Michael Cox wrote: Now that may be outside your personal risk tolerances <...>

It might still be, yes. Not WAY outside them, though. If you're going to borrow money, your friend's plan is certainly one to emulate.

Toward the other end of an imaginary riskiness spectrum, I'd place a plan like this one:

"I'm 24. I owe $100,000 for my bachelor's degree in something impractical. I'm earning $40,000 managing an Enterprise Rent-A-Car, so I think the bank would probably loan me another $100,000 to buy some land, if my parents co-sign. I want to borrow the money, buy the land, and then quit the rat race to start a 'regenerative enterprise' on my land, either selling essential oils or teaching permaculture classes. Should I do it?"

So by contrast:
Your friend didn't have debt before.
My hypothetical Young Permie already owed a sum that will take decades to repay.

Your friend is borrowing an amount she could probably repay in a year or two.
Young Permie is borrowing an ADDITIONAL amount that will take decades to repay.

Your friend is borrowing from parties who probably won't harm her beyond harsh words.
Young Permie owes money to parties who won't hesitate to confiscate all his property and then garnish his wages. (And did you know federal student loans can't be bankrupted in the US? You owe that money forever, regardless of circumstances.)

Your friend has a plan that's ALREADY working.
Young Permie barely has a plan at all, let alone a detailed plan, or better yet, a proven plan.

Your friend has another income source.
Young Permie is quitting his job to risk everything on this new venture.


Big difference, right? I think that's a good illustration of the "it depends" that the OP mentioned. We can all agree that "bad debt" is bad, but whether "good debt" is good, that depends on lots of other factors.

Mike Cantrell wrote:
Your friend has a plan that's ALREADY working.
Young Permie barely has a plan at all, let alone a detailed plan, or better yet, a proven plan.

Your friend has another income source.
Young Permie is quitting his job to risk everything on this new venture.

Here is the crux of the issue. It is not necessarily debt that is the problem, but debt without a clear plan for how either pay that debt off, or leverage that debt to increase your income. Borrowing to buy land might be a good idea, but only if that land then is producing income for you. And generally land takes a lot of cash after it has been bought to turn it into a viable business.

I think it is Joel Salatin who has his interns set up their own enterprises while they are working with him. They spend 6 months or so learning the systems he already has, then make a proposal for how they can generate income. For example someone might decide to make value added products from ingredients grown on site (think Jams, chutneys, etc...). Another might spot that there is a niche market for a "rent-a-goat" system lending goats out to eat brush for neighbours. The key is that each intern supports themselves by the income that their miniventure brings in.

Going through this system each intern learns what it really takes to make money in a small business from the land.