Taking On Debt

Shop owners advise a colleague that taking on debt for land and a building is wiser than borrowing to buy equipment. August 5, 2006

I currently rent 900sq ft in the Ozarks for 200 per month. I want to build a bigger shop, 3200 sqft, in our local industrial park just for the space, visible location and room to grow. (This will make you big city guys sick.) I can do this for 50K, and since I will have the space, I will buy more equipment, about 20K worth. This will cost me about 700 a month plus utilities. I can get the loans, but is this too much debt?

I have some operating expenses debt, but not much (bad winter). I have been in business one year, and have one employee. I have some jobs lined up to keep us busy the next 6-8 months, but really don't have the space. I currently store materials in trailers and two other off-site locations, and do all my finishing outside.

Forum Responses
(Business and Management Forum)
From contributor J:
If you can keep building overhead in the 10 to 12% range, max, go for it. The Ozarks are unique for costs of land and buildings.

From contributor E:
If you have the work, then do it. Debt is only scary to me if you are buying tools or space on pure speculation. Sit down and add up how much more work you could do if you bought the new tools and the new shop. If the money you would make is more than how much your payment is, then build it now. You will wonder what took you so long.

From contributor B:
I'm very conservative when it comes to establishing debt. Back in the late 80's I watched many small, medium and large operations close due to being overextended when things slowed down. Many of these guys lost everything. You are also seeing that same thing now (although more complex in nature) with the very large operations as they fail to compete with Chinese imports.

However, I'm a big fan of real estate acquisition and as long as the debt for that can be handled even if things get a bit slow, then I'd say, do the building. However, being a go-slow sort of person, I would suggest looking closely at holding off on new equipment purchases "just because you have the space." Do the building, but wait a year or until work load dictates, to spend more on equipment. It's easier to buy it when you need it then unload it when you are in trouble.

From contributor S:
You need to grow according to your business plan. If your 5 year model has you selling 1 mill with 10 employees, with CNC and a pre-finish shop, then you need to plan for those things when you build the building. Things like a break room, where to locate electric drops and how much voltage/amps, venting for spray booth, all could be accounted for in the planning of the building, and a thousand times easier to deal with in the initial construction than as a retrofit. No plan is written in stone, but if you have targets, it can help mold your decision. Conversely, if you don't want to grow too large, then you might keep the building very simple, or split the building and lease part. You should at least consider the debt load according to your projected growth, not just what your company size is now. Somewhat speculative, but try to keep projections as realistic as possible.

From contributor F:
Put me in the lot of people who have seriously overextended themselves in the past. It is the worst thing you can do. It jeopardizes your business, health, marriage, etc. But I did it on equipment and leases. A building and property are the best investments you will ever make. If you are sure the business will support it, get into your own building, but hold off on the temptation to take on any other payment obligations until you are very comfortable with your cash flow.