The Mistake Most Entrepreneurs Make

Early on, when Mike Barrett was launching his own business, he made the mistake that most entrepreneurs make: he thought some debt would be good. Manageable. Even helpful when cash was needed for fast growth.

Bankers told him a line of credit was a smart thing — what smart business people get to help them grow. They weren’t telling the truth.

For a small services company, debt is akin to giving a high-limit credit card to a teenager. Small business lenders don’t care if you’re service-based. They want the loan business regardless. They’ll give you debt-laden handcuffs you’ll regret later — taking payments directly from your business checking account, getting paid first, charging high interest rates, and requiring a personal guarantee. If your business fails to pay, they collect from you personally.

Mike learned this early. Then he changed course entirely.

The Result

His service company started 8.5 years before he wrote about this philosophy with three employees. By the time he went public with it, it had grown to nearly 400 employees and was one of Oregon’s fastest-growing companies. All of it without any debt. Profitable the entire time.

The question he gets asked most often: How?

The Rules

Rule 1: Revenue does not matter. Gross margin does. Most entrepreneurs chase revenue. It’s the wrong metric. Revenue tells you how much came in. Gross margin tells you how much you actually kept — and whether the work was worth doing. Pick customers that provide healthy gross margins. Fire the customers that drive your margins down. Ignore the prospects that would do the same.

Rule 2: Set your gross margin ratios — and never violate them. Mike’s company ran on a simple framework: never spend more than 30% of gross margin on overhead. Profit distributions were tightly controlled. They only distributed cash to shareholders when three conditions were simultaneously met: at least 40% year-over-year growth, at least 40% gross margin, and at least 10% net profit margin. Everything else stayed in the business to fund growth.

Rule 3: Build toward being the lender, not the borrower. The goal is not just to avoid debt. The goal is to build a company strong enough that others would come to you for capital. That shift in orientation — from borrower to lender — changes how you make every decision.

When Debt Makes Sense

Not all debt is evil. At significant scale — above $50 million in revenue — certain low-interest debt instruments can accelerate acquisitions or strategic moves that would otherwise take years to execute organically. When a unique opportunity to acquire a competitor arises, a small amount of affordable debt might be the right tool.

But that threshold matters. And below it, for the vast majority of service companies, the answer is almost always: stay clean, stay lean, stay free.

The Bottom Line

Bigger is not necessarily better. Debt-free and profitable is better.

Drive it like you stole it — but own every mile.