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when I started train Yule I actually went $300,000 into credit card debt so it was a very calculated decision and I want to walk you through the economics of why I did what I did and why it might or might not be a good idea for you to build a business around your life and not your life run your business dads are gonna tell you a lifestyle of supercars and fancy man you can get a business up and running really quickly okay so I want to preface this whole thing by saying that I never recommend using your credit cards to start a business because when you just get started you're experimenting and trying to figure out what works and that is not a good use of debt because if it doesn't work and you get overextended you end up with this crazy bill that you might never be able to pay and no one wants to be in that position but when I do recommend debt is when you're scaling a business so once you've figured out how to get customers and what those customers will pay you you can use debt leverage debt to go out and find more of those customers if the economics make sense so I want to walk you through the same formula I went through a train Yule and the reason why I ended up maxing out all my credit cards before we raised any money so here's how it breaks down the first thing you got to know about your business is what it costs you to get a customer now if you're just getting started and you only have a couple customers this might be hard to calculate so you've got to make some kind of educated guess if you're running Facebook ads or Instagram ads and you've gotten a few customers you can probably take a more educated guess or if you've gotten customers mostly from word-of-mouth referrals that sort of thing you can try to factor in how much time you've spent networking and building those relationships and then just divide out your salary cost that's kind of like the Ground Zero sales team so either you've got a sales model or you've got a marketing model but either way you've got to have a customer acquisition cost so that's called your CAC customer acquisition cost all right so for the purposes of conversation let's say that our customer acquisition cost over here is $100 it costs us $100 to go get a customer now that number might be really small if what you're doing is consulting or services or something where people pay you thousands of dollars but for a small software product like we have let's just use a flat number $100 so that means every time you spend $100 in advertising you can predictably get one customer and hopefully that scales with the life of the business this will change over time but once you know approximately your customer acquisition costs the next thing you want to know is what customers pay you on average so in software like Trane yule we break this into a monthly cost a monthly price and we call this the average revenue per user or per unit and that's per month so let's say the ARPU of that customer is $20 so that means every month once you acquire this customer they pay you $20 and they chip away at that cost that you paid to go get them now the last thing that you want to know is the lifetime value LTV these are super important metrics to know for your business lifetime value you can just kind of take a stab at if you're just starting but what this is is how much money will that customer pay you over the life cycle of them being a customer with you this could be a couple months it could be just a day if it's a one-time purchase or it could be years if they're a longtime customer and so you want to think what is an approximate lifetime value of that account when we were starting out I just kind of ballparked and said maybe they'll be with us a year maybe two years maybe eighteen months okay so let's make it two years so it's $20 times 24 months of that customer means their lifetime value for you is four hundred and eighty dollars okay so what we're looking at here is it costs us a hundred dollars to get that customer they pay us $20 a month on average for 24 months so over their lifetime they'll be worth four hundred and eighty dollars now once you understand this funnel I want to walk you through what it looks like to use debt for this so if you think $20 into a hundred means that that customer will pay back the cost of acquisition in five months and with your typical credit card you might be like 15 e 20% APR so that's like a 1.5 percent a month annual percentage rate on the interest you're paying and remember the first 30 to 60 days from making that purchase are within your statement period and then within the due date that the bills due so thirty to sixty days could almost be free to use that money on a credit card so now let's say we carried that for four months we had the statement period and we carried for four more months that's our five months over the course of four months I paid six dollars in interest if I didn't pay off any other principal this is really simple math but let's say it cost us $100 to get the customer plus $6 an interest that I paid means that customer cost me 106 dollars and by month five I am profitable now this assumes that you're purely profitable on their subscription that there's no cost of goods sold so there's a lot of assumptions here but I'm giving you my experience from Tran Ewell which is a software business with really high gross margins so if I can pay back a customer in five months that cost me about six dollars that hundred and six dollars then over the lifetime of that customer turns into four hundred and eighty dollars and the difference that you know three hundred and seventy four dollars or whatever is what you make in profit on that customer so the question is this if the hundred dollars is going to be paid back anyway would you spend six dollars in interest to make over three hundred and fifty dollars in lifetime value of that customer you can't earn reliably six dollars into three hundred and fifty dollars would you do that my answer was yes and let me walk you through another level of why it's important so in the software world your business is often valued based on a multiple of your annual recurring revenue in other industries it could be totally different it could be based on your EBIT die or a profit something like that but in software it's typically a multiple of your top-line annual recurring revenue so if this customer right here spending twenty two hundred and forty dollars a year with me and I got some kind of software multiple like you're seeing in all the headlines today of ten X maybe that means that that customer is worth twenty four hundred dollars to the value of my business so never mind the fact that you paid one hundred and six dollars to go make another three hundred and fifty and profit you paid that six dollars in interest to add a twenty four hundred dollar value to the business these are the economics that come into play when you determine whether you should use debt to fund your business but based on that calculation hopefully what you can see is that I'm not going into debt I'm leveraging debt leveraging other institutional money or whatever it is to go out and reliably acquire customers pay them a little fee for letting me borrow the money for a few months and then once I've paid it back that customer continues to be profitable and adds to the valuation of my business I know this stuff can be technical but that's the reason why I was willing to tap into all my credit cards because when investors come into your business and they're offering you money based on a certain valuation why would you take investor money if you could still exercise your own ability to use debt to use whatever credit is available to you shouldn't you grow your business as much as you could before you bring in someone else that's a decision for you to make but this is how I ended up in 300 thousand dollars of credit card debt with a disgruntled wife and then how I spun that into a highly valued business that today is doing very well