Building a Business on a House of Cards
By Robbie Vorhaus
There's an old saying about debt: When you borrow $100,000, it's your problem, but when you borrow $1 million, it's their problem.
Which brings me to the use of a particular type of debt to which entrepreneurs, myself included, have turned to launch their companies: credit cards. In my case, three years into the founding of my Manhattan-based public relations agency, Vorhaus Communications, I found myself $125,000 in debt, $65,000 of which was on credit cards.
So it was my problem then, and because I wouldn't ever get to the $1 million, it would always be my problem -- as it will be for company founders who do the same. Plastic is helpful, sure, albeit expensive, even more so a decade and a half ago than now.
Back then, interest rates were topping 18 percent and the cards came with annual fees, even though, unlike today, you could float your money for six weeks. Today's fast computers have put an end to that. However, what I remember most of all about the debt in those years is that it was terrifying.
A PERFECT STORM.
It was terrifying to be personally on the line for so much money -- half of that $125,000 was credit-card debt, and the balance represented loans from family and friends and bank overdrafts. So terrifying that I even acutely recall my contrasting emotion when I finally began paying it back in 1993, after my business had turned the corner.
Paying it back in huge chunks, as much as $8,000 a month, I felt as happy as hearing the song birds sing at dawn, or watching a rainbow after a long, slow rain. It just felt good.
Which brings me to the point of this article: more than anything, because I have been there and done that, I want to help other entrepreneurs who are just heading down that route. If I can convince just one founder to use plastic judiciously, I will have been of service.
In the fall of 1989, when I left CBS TV, after also working at CBS News, I found myself in a new company -- my own -- and a new industry, public relations. I was launching my business just as a major recession was taking hold. I was 37 years old, newly married, and beginning my trek into heavy debt.
It was, looking back, truly the gathering of the perfect storm. Because I was in a new industry, I had limited relationships. (My relationships were in the media, not with corporate communications heads.) I had limited capital (always my problem), and the 1991 recession had begun. I hadn't realized how bad I had slipped until, after working for 20 successful years in journalism, I had to go out and get my New York taxicab license, just to keep cash coming in.
THE LOWDOWN ON PLASTIC.
The irony is that when it comes to plastic, even doing it right can turn out wrong. I had worked at CBS TV until the very last day, whereas perhaps I should have been leveraging contacts to lay the foundation for my own business. I should have been getting a handle on the nuts and bolts, such as ordering stationery.
Instead, with a severance package, I found myself suddenly without a paycheck and with a company. To conserve cash, I began in the living room of my apartment, not moving to rented office space for two years. I lined up contracts from my former employer -- contacts that got, and kept, the ball rolling for about a year. Partly because my building's coop board forbade it, I couldn't touch the equity in my apartment.
In sum, break down that $125,000 over the two years in which I had taken it out -- a six-month stretch in 1990 and 1991, when the CBS contract work had ended and absolutely no work came in, and another 18 months thereafter,when there was only a trickle -- and that's hardly extravagant spending.
Divide the $125,000 by 24 months, understand that I had to pay for postage, travel, and entertainment to secure clients, and also for my living expenses in Manhattan, and that's $5,200 a month-- indeed, downright frugal.By Robbie Vorhaus
THE VISION THING.
Plastic debt isn't just about money, though; it's about entrepreneurial thinking and philosophy. When you're young, as I was in the early 1990s, and absolutely convinced that you have something unique to offer, perhaps it pays to borrow on credit cards. That is because what you need at that age is blind faith.
In my case, I had a model for what I believed was a different form of public relations, one based on journalism and the elements of storytelling. And I had my tenure at CBS TV and News, both of which I assumed, naively perhaps, would enable me to easily win clients.
And I was a believer. Even in the darkest days, when I resorted to driving a cab, I refused to cut my losses and go to Hollywood, where I had been offered a job as a sitcom writer for shows like Evening Shade and Rosanne.
In short, I was learning what it meant to be an entrepreneur. It didn't mean hating one's boss, or not liking to be subject to authority, but rather high risk. Make that high risk, not of success, but of failure. If nothing else, I learned that I needed to be standing, essentially, in business, when the tide turned.
That is why I now view the assumption of credit card debt differently. I am no longer naive about building a business. I know now that it takes forging relationships that involve figuring out what I can do to meet clients' needs. No longer do I focus on the image-enhancing tactics of maintaining the appearance of being a business. Likewise, I have a different view of the financing that makes it possible.
These days, I consider plastic a tactical tool for laying the groundwork for business that I am reasonably certain I will secure. In other words, if I have a good reputation, a good management team, if my calls are getting returned, and I can see revenue five months hence, but I need that computer server today, I would be inclined to put the purchase on a credit card.
If, on the other hand, I am using the card merely to cover expenses, I don't see credit card debt as a good idea. If you're floundering and using the card, you'll find yourself floundering and in debt.
A FINAL MYTH.
Entrepreneurs get caught on a treadmill with plastic. They keep hoping to get through just another month until the business turns. This line of thinking is inextricably linked to another myth: that the debt belongs to a credit-card company, and you can just take it and not repay.
Nothing could be more wrong. When borrowing on plastic, you must always make at least the minimum payment and contact the credit card company if you cannot. That is because if you create a bad credit record for yourself, you won't ever be able to lease equipment or be granted other forms of credit.
In my case, when the spigot turned on for my business, I not only paid back the card companies in massive chunks, but also my other creditors: my wife and her family, my friends, and the bank overdrafts. As much as anything, I wanted my lenders to feel good about lending to me.
Most of all, I wanted to be set free from the terror of not being able to pay back my debt, and be able to hear those beautiful birds singing at dawn. Because, in the final analysis, I knew I would never get to the $1 million point where the debt was their problem, and that the credit-card debt I had incurred was, indeed, my problem.
Robbie Vorhaus, 50, founded Vorhaus Communications, a New York-based communications and public relations firm, in 1989, and currently serves as president and chief executive officer. A communications strategist, he appears frequently in major media, including CNN, Fox News, The Wall Street Journal, and The New York Times, as a commentator on public opinion and current events. Today, his company has annual revenue of $3 million and 20 employees.
Entrepreneur's Byline comes to BusinessWeek Online readers courtesy of EntreWorld.org, a resource for entrepreneurs that is sponsored by the nonprofit Ewing Marion Kauffman Foundation.