December 10, 2012, 5:00 am

What You Get From Leverage

by: The Financial Blogger    Category: Leveraging Strategies
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There is nothing better than rolling with others people money

 

Last week, MD wrote about how you don’t need money to start a business. He explained what you can do to start a business without a single buck in your pocket. I must agree with him that with the internet, pretty much anybody can throw themselves into the business mosh pit and start thrashing. I use the word thrashing because running a business is not always a fun game where you sing and dance with butterflies. Sometimes you also have to stand-up and get ready to battle your way out. But it doesn’t mean that it’s not fun ;-)

 

I Believe in Leveraging

 

I am a firm believer in leveraging. I know it’s not trendy and also know that many folks will tell me that there is nothing better than paying cash for everything and not carry debts. In a perfect world, I would like to be debt free. But that’s not my ultimate goal because I know how much I can do with more resources. Let me share with you how we borrowed money three times to accelerate our business.

 

The First Loan is Scary

 

I still remember exactly how we took the decision to borrow money to make our company grow. My partner and I thought of buying a blog in order to grow our network and expand significantly. We had bought Intelligent Speculator a few months before our big transaction and discovered that we could make a lot more money with an existing blog than by starting a new one. We finally found “an important player” to buy and we were all excited about it. We started the discussion with the owner by email and quickly reached 5 figures in our negotiations. The price was worth it but we didn’t have more than $4,000-$5,000 in our company bank account. I started to realize at that time that we would need to find funding if we wanted to make that purchase.

 

When we got close to sealing the deal, I was driving with my wife looking at properties. We used to drive through new neighborhoods to look at properties. Sometimes to get ideas for our own house and other times to see what was on the market. Between two stops, I called my partner to make up our minds. My wife was sitting right beside me and she wasn’t too aware of the whole deal. She just knew that we were going to buy a big site. Then I said to my partner;

 

All right, lets do it

But we dont have the money he replied

I just have to borrow it from my house, I have enough equity

 

I stopped driving at that time and my wife stared at me. Yeah… I should have told her about that move… lol! But it wasn’t the first time I had used leverage in my life and she knew that I was good with money. This is why the discussion with her was brief. But still, I was scared big time. For the first time of my life, I borrowed more than enough to buy a brand new car and was putting this into my company to buy a domain… wow, I must have been crazy!

 

This is How We Started Our Business

 

This purchase was the most important move in our business ever. It opened the doors to new bloggers, new contacts and new ways of making money. We had learned about how SEO was done on other sites and we could improve it with our own techniques. After only 6 months, we doubled the site’s income and we were rapidly paying my mortgage back.

 

Then, we got an offer only 9 months after owning the site. This was a no brainer at that time; it gave us enough liquidity to pay off my leverage loan in full, treat our self with some company expenses and we bought 2 more sites a few months afterwards. At that time, we could really tell that we had a solid business with a core strategy and a plan for expansion.

 

The Second Loan Was Even Scarier

 

I thought that borrowing enough money to buy a car and investing it in my company was scary. I didn’t know anything about leveraging! Our second loan was even more scary. For a while, we were running debt free in our company and we were able to grow on a consistent basis. But we wanted to make another jump. We wanted to generate 6 figure gross revenues from the company on a stable basis. The amount to borrow for this site was scary by itself. It was almost double the previous loan! At that time, we didn’t have equity on our house to borrow that money and this is why we reached out for private money.

 

But the scary part was not there; the scary part is that we were about to hire a VA to work for us and help us to manage the whole business. I remember that I was afraid to hire someone. It was scary because for the first time in our short lives as business owners, we became responsible for someone. We had to generate money because that individual was counting on us to get his pay check. Wow… I never thought that having such responsibility would be a burden at the same time. I always thought that having employees was “cool” because we were finally running something close to a “real business”.

 

Another Learning Lesson

 

I can’t say that this project was a failure but I can certainly call that it didn’t go as we thought it would. The metrics and ratios we used to see how much we could make with that site were completely off. Since it was a big site we had no other choices but to pay a premium. We didn’t mind since we had a plan. But the plan didnt work out as we thought it would! We were convinced that we could double the monthly income in a heartbeat. After buying it, we lost an important advertiser and had difficulties finding another one to replace it.

 

We really had to work hard to improve this site and make it profitable. At that time, the money made wasn’t as easy as we thought it would be. To date, it’s been a while that this site has been in our network and I can tell that we are still making good money with it but it wasn’t that easy. Fortunately, we realized that there was, once again, new ways to make money. But more importantly, we realized that we couldn’t export our business model on every single site we buy and ride it to the top.

 

Stay Tuned For Tomorrow!

 

When I started writing this post, I wasn’t sure it could be long enough to make 1 post. Now I realized that I still have a lot of things to say about leverage! Tomorrow, I’ll be talking about our third leverage story along with how we deal with debt in our business. Stay tuned!

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Comments

Good points in here Mike. Leverage is a powerful tool that you can really use to take you to the next level. I just wanted to remind young folks that they can’t use their lack of financial resources as an excuse from getting started with something.

I used leverage when I bought my home, condo and several income properties. The best part with income property is the tenants pay the payments and I even make a profit.

[...] I started to talk about my experience with leveraging. Today, I have a third story about borrowing and how we deal with leverage in our business right [...]

Very interesting. I know some people (like you and your business partner) are bold and confident enough to make a move like that but I think I would be even more scared than you were. Obviously it worked out well for you and you actually made back the money you borrowed in a relatively short amount of time, but that doesn’t happen for everyone.

I don’t think I am confident enough in my online skills to take on leverage for this world, but I will 100% take on leverage for a rental property in the upcoming year.

I also use my margin account OFTEN to take advantage of dips in the market when I don’t have cash in the account.