Entrepreneurial Finance, Fourth Edition: Finance and Business Strategies for the Serious Entrepreneur, 4th Edition

8

Debt Financing

Introduction

Bill Gates had a rule that Microsoft, rather than incurring debt, must always have enough money in the bank to run for a year with no revenues.¹ In 2013, Microsoft had $77 billion in cash on its balance sheet.² Unfortunately, 99.9% of entrepreneurs will never be able to emulate this financing plan. Therefore, they must be willing to pursue and accept debt financing. Financing with debt capital is perfectly fine, and we saw from the previous chapter that it is quite common. The most important question that an entrepreneur should ask himself when deciding if he should raise debt financing is, “Can the company’s cash flow, under the worst case scenario, service the debt obligation?” If the answer is yes, then I recommend ...