The Biggest Mistake I Made When Buying My Business

I’ll be the first one to tell you I’m not perfect and I’m still learning. Bonus for you - I’ll tell you all about it so your journey to entrepreneurship will be smoother. So here is it…

I bought an asset-heavy business without securing a line of credit first.

Big mistake. Huge. It’s taken me over a year to fix it. 

To be clear, I asked for one. I knew I should have a decent line of credit on board when I acquired my company. But the bank said no. I reluctantly said ‘okay’. And I’ve regretted it every day since. 

Why It Was A Mistake

When I closed the loan (a Small Business Administration loan through an SBA lender), 100% of those funds went to acquiring the business. That means I had nothing left for operating expenses. And certainly nothing in the bank for emergencies. The business had no credit - to do anything. 

For more than a year, I’ve been operating this business feeling like a tightrope walker with no net. Just me out here trying to stay balanced on this thin wire a hundred feet in the air with nothing but concrete to break my fall. Risks are part of being an entrepreneur but taking on a company with a lot of inventory without a line of credit was a risk that could’ve and should have been avoided. 

All of my company’s money was now tied up in inventory and things like warehousing. And if customers didn’t pay us for things they already ordered and we didn’t make more sales, I was fucked. Splat. Me, my business and my entrepreneur dreams would plummet towards the earth. 

A line of credit acts as a safety net, giving you the flexibility to manage cash flow dips and unexpected expenses with ease. Without it, every financial hiccup threatens to knock your business off balance. Cash flow can be unpredictable in businesses that rely heavily on assets such as manufacturing plants, construction companies, or transportation fleets. A line of credit provides immediate access to funds when revenue is slow but expenses keep coming. Expenses like payroll and just keeping the lights on. 

Moreover, having this financial cushion helps maintain good relationships with suppliers and creditors by ensuring timely payments—even during lean periods. It’s all about staying fluid in an often rigid landscape. Right when I bought my company, we were in a huge cash crunch because money had been spent on creating a new line but it wasn’t to the sales stage yet. We had to get very creative doing things like going to our suppliers and extending our payment terms. Nobody likes to do that; it’s not a great feeling. But it was what the hard reality demanded. 

Not to mention - think about how much time I wasted just trying to keep my newly acquired business afloat instead of growing it. We couldn’t even think about new investments in technology or upgrading equipment unless it was a dire emergency - let alone think about entering new markets or making acquisitions. It was not the way I meant to start my entrepreneurial journey. 

I’m lucky I was able to wobble my way along that tightrope. I was just able to manage. But I certainly couldn’t look at anything except my very next step. It was incredibly, incredibly stressful.

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Why I Made The Mistake

Speaking of stress, that’s exactly how I got myself into this stressful situation. When I bought my company I was not far out from a life-threatening health scare where I was told I might even need a heart transplant to survive. My ticker was in no shape to take on big stress. 

Nevertheless, that’s where I found myself when the deal to buy my company was being held up. The SBA had approved my loan - without a line of credit. Their reasoning was that the company’s accounts receivable (AR) was sizeable. And once those invoices were paid up, we’d have plenty of operating cash. 

I knew that wasn’t true. It wouldn’t be enough to float this business that had a lot of physical assets and inventory. The broker for the deal was calling me multiple times a day saying, “we have to close, we HAVE to close”. My banker, who had an idea I was getting a raw deal said he agreed with me, but he was worried about the stress drawing things out longer would take on my health. 

I knew I needed a line of credit to do it the right way. But I caved. I took the money, closed the deal to buy my business (which was the dream I knew I needed to make come true in order to avoid the cubicle life that contributed to my health problems in the first place), and I figured the rest would be a problem for future Kevin. 

Future Kevin did not appreciate it one bit. 

How I’m Fixing the Mistake

I’m finally (knock on wood - hopefully before this article gets published) closing on a line of credit for my business. It’s taken me more than a year of fighting tooth and nail to get it. 

The bank should not have done my original loan without it. They know it. It went all the way up to the bank president. And, to their credit, they’ve been doing what they can to get the SBA to reconsider and now my company will have a line of credit. Thanks in part to the mistake - a very healthy one that’s far more than I would’ve gotten initially. So there’s a bit of good news. 

With this line of credit, the company can finally look ahead - because we have a safety net under that high wire, at last. Throwing a cartwheel into the tightrope walk or adding a trapeze act will be no big deal now. Because if we have a little wobble, that net is going to be able to catch us softly while we climb the steps again. We’ll be able to take risks to improve and grow. 

How You Can Avoid the Mistake

So how can you avoid this mistake? Be your own advocate and do a better job of it than I did. 

No one else has your best interest at the top of their priority list - except you. My original banker, while well-meaning, also had reasons to close the loan that had everything to do with his bottom line, not mine. He was getting the benefits of closing a big loan which was a pretty good bet since it was guaranteed up to 90% by the SBA. He had every reason to close that loan and not let me prolong the process where there was potential for things to go sideways.

Of course, the broker was pushing for me to close the deal. His commission and his reputation were on the line. He was doing his job. 

You need to do your job - which is to stick up for yourself and not take deals that will put you at so much risk and create huge stressors in your life for months to come. 

Now, could future Kevin have convinced past Kevin to hold off on the deal until he got a line of credit in place? I doubt it. When you’re in the heat of the moment and just exhausted and still recovering from heart issues… you just want it to be over. 

I’m hoping that sharing this story helps future you. 

Generally speaking, aiming for an amount equal to one-fourth of your annual cost goods sold (COGS) makes sense for most businesses looking at seasonal fluxes or cyclical sales patterns. It gives you enough cushion to handle unexpected expenses or take advantage of opportunities without overextending yourself financially. To nail down this number, start by looking at your annual COGS. If crunching numbers isn't your thing, tools like Investopedia’s guide can help make sense out of COGS and why it matters.

Let’s Sum It Up…

Securing a line of credit before closing on a business purchase is like putting an invisible safety net under your financial tightrope. It's not just about having funds at your disposal; it's about the peace of mind and strategic flexibility it offers.

Cash flow is king in the early days post-acquisition. A line of credit acts as a cash flow buffer, smoothing out the ebbs and flows inherent to new ownership. Whether it’s covering payroll during slow sales months or investing in quick-turnaround inventory, accessibility to funds means less stress over day-to-day operations.

Without a line of credit, you're in scramble mode, but with one, you have immediate access to capital. Being prepared with that line of credit means you can tackle unexpected challenges head-on, without missing a beat.

With that, my high-flying act as an acquisition entrepreneur with no net comes to a close. It was a one-time-only, limited engagement. From now on, it’s nothing but net. 

Thank you for reading Capitalism for Humans. This post is public so feel free to share it.