Borrowing and the Use of Other Men’s Money

14.1 Why a Prosperous House May Still Borrow

A House should not remain unnecessarily small merely because the family possesses limited cash.

If sound opportunities exceed available capital, prudent borrowing may increase the return earned upon the family’s own money.

Seasonal needs: Many trades require money before revenue returns. Grain may be purchased at harvest, wool assembled before shipment, or cloth financed before a fair.

If the House expects payment later but must act now, borrowing can bridge the interval.

Goods in transit: Capital may already be tied in merchandise at sea, customer receivables, or bills not yet matured. The House may be wealthy but temporarily short of usable funds.

Borrowing can prevent us from selling sound assets merely to meet a temporary need.

Unexpected opportunities: A competitor may be forced to sell excellent goods cheaply. Freight space may suddenly become available. A customer may offer an unusually attractive purchase if we can act immediately.

The ability to borrow allows the House to move before older capital returns.

Preserving liquidity: Sometimes we should borrow even though enough cash exists to complete the transaction.

If using nearly all cash would leave the House exposed to unexpected obligations, retaining reserves while financing part of the purchase may be wiser.

Liquidity has value even when it appears expensive.

Matching capital to purpose: Some assets can prudently be financed partly with other men’s money when expected income is stable and the House retains sufficient margin for error.

But the fact that an asset can support debt does not mean the maximum possible debt should be used.

Relationships with lenders: A House that borrows occasionally and repays exactly as promised builds access to credit before it urgently needs it.

The worst time to establish a borrowing relationship is the day we desperately require money.

Do not borrow merely because money is offered: Easy credit tempts merchants into transactions they would reject if they had to use their own coin.

Every borrowed lire should answer a purpose.

If we cannot explain what the money will finance, how long it will be employed, what return is expected, and from what source repayment will come, we should not borrow it.

14.2 Deposits, Partnership Capital, Bills, and Other Sources of Funds

Borrowed or outside capital reaches the House in several forms. They differ in cost, duration, control, and obligation.

Deposits: Merchants, relatives, investors, or other persons may leave funds with a reputable House for safekeeping, payment, or agreed return.

Deposits can provide useful funding, but they may also be withdrawable sooner than the assets financed with them can be converted into money.

Never treat deposits as permanent capital merely because depositors have left them untouched for years.

What can be demanded back quickly should be governed as short-term money.

Partnership capital: A partner may contribute money to a compagnia in return for a share of profit and loss.

This differs from debt because partnership capital generally bears business risk. If the venture loses, the partner may share the loss according to agreement rather than possess a fixed claim payable regardless of outcome.

Yet partnership capital comes with ownership rights, information rights, and sometimes authority. Do not give away part of the House merely to avoid paying interest.

Temporary participation: Capital may also be provided for a particular voyage, cargo, or venture rather than the whole enterprise.

This can be useful where another investor wishes exposure to one trade while the family retains control of the broader House.

State clearly what property belongs to the venture, how profit and loss are shared, and when the arrangement ends.

Bills of exchange: Bills may provide credit as well as move money between cities. By receiving funds now against payment due later elsewhere, the House can finance trade while integrating the borrowing with its exchange operations.

But do not let the complexity of exchange disguise the reality that money received now creates an obligation later.

Trade credit: Suppliers who allow thirty, sixty, or ninety days finance part of our inventory.

This can be one of the most useful forms of capital because repayment may occur after the goods have already been sold.

Yet supplier credit is still debt. A House that purchases from many sellers may accumulate large obligations without noticing how much total borrowing has occurred.

Loans from merchants and bankers: Direct advances may be made for a fixed term, with agreed compensation and sometimes security.

Prefer lenders who understand commerce and remain steady during ordinary fluctuations. The cheapest lender is not always the best if he withdraws at the first rumor.

Family money: Relatives may lend or contribute capital. Define whether the money is debt, partnership investment, inheritance advance, or gift.

Family affection should not replace accounting clarity.

Several funding sources: Do not become dependent upon one lender, one banking house, or one form of financing.

A House funded entirely by one source gives that source power over its survival.

Translator note: Early modern merchant houses combined many forms of outside capital, including deposits, partnership contributions, trade credit, direct loans, and obligations arising through bills of exchange. The boundary between commercial finance and ordinary trading was often less distinct than in modern banking systems.

14.3 Matching the Term of the Debt to the Use of the Money

One of the most dangerous errors in finance is borrowing briefly to invest for a long time.

Repayment dates should resemble the period for which the money will be employed.

Short trade, short debt: If money finances goods expected to be purchased, shipped, sold, and collected within three months, short borrowing may be suitable.

Long assets, longer capital: If money purchases a warehouse, ship, permanent office, or other asset that may take years to repay its cost, financing it entirely with bills due in a few weeks creates continual refinancing risk.

The asset may be excellent and the financing foolish.

Repayment source: Every debt should have an expected source of repayment. A loan financing a cargo should ordinarily be repaid from the sale or collection connected with that cargo or from other clearly available liquidity.

Do not borrow on one venture while secretly depending upon another speculative venture to repay it.

Allow time for delay: If a normal trade cycle is four months, borrowing for exactly four months leaves no room for late ships, slow customers, quarantine, or administrative delay.

Finance according to realistic conditions, not perfect ones.

Stagger maturities: Do not allow many debts to mature together merely because they were easy to arrange at the same time.

A House can support a large total amount of debt and still fail from one concentrated week of maturities.

Avoid continual renewal: If a debt called “short-term” has been renewed six times, it is no longer temporary in substance.

Recognize the true duration and obtain financing appropriate to it.

Do not borrow long merely for comfort: Long-term money may cost more. If the use of funds is genuinely brief and repayment highly certain, paying for unnecessary duration wastes profit.

The proper term balances cost against the danger of needing money before the asset becomes liquid.

14.4 Maintaining Liquidity When Credit Tightens

Credit is easiest to obtain when merchants need it least and hardest to obtain when many need it at once.

Therefore prepare for tight credit before it arrives.

Hold more cash when conditions weaken: If banks become cautious, exchange becomes difficult, major merchants fail, or political disturbance grows, increasing liquidity even if doing so reduces immediate profit.

Cash held before panic is protection. Cash sought during panic is expensive.

Shorten assets: Reduce long customer terms, collect overdue accounts, avoid speculative inventory, and prefer quicker-turning trades when financing becomes uncertain.

The House should make its assets more liquid as its creditors become less patient.

Reduce new commitments: A tightening market is not the time to expand every business merely because distressed competitors offer bargains.

Some bargains exist because nobody else has the liquidity to hold them.

Do not join them in lacking liquidity.

Preserve lender confidence: Pay obligations exactly when due wherever possible. Communicate early if difficulty appears.

A lender hearing bad news first from us may remain calm. A lender discovering it through rumor may demand repayment immediately.

Do not hide strain: Borrowing secretly from several new sources to conceal a shortage often makes the eventual crisis worse.

If the House has a temporary problem, understand it and solve it openly among those who must know.

Maintain unused capacity: Avoid using every available borrowing facility during good times. Some room should remain for unexpected needs.

Sell before being forced: If liquidity must be raised, dispose first of assets that can be sold with the least damage. Do not wait until creditors dictate the timing.

A voluntary sale under pressure is unpleasant. A forced sale after default is worse.

Coordinate all offices: During tight credit, one branch must not hoard cash while another borrows dearly. Obtain frequent reports of cash, receivables, payables, and maturities across the House.

Liquidity is a property of the whole House, not of one counting room.

14.5 The Point Beyond Which Leverage Becomes Folly

Borrowing increases both opportunity and danger.

If the House earns more on borrowed money than the money costs, the family’s return may increase greatly. If the trade turns against us, losses also reach the family more quickly.

This is leverage.

Translator note: “Leverage” is modern terminology used here for clarity. Early modern merchants understood the underlying principle directly: the use of borrowed funds could magnify gains on the family’s own capital, but also magnify losses and create fixed obligations that survived an unsuccessful venture.

Debt becomes dangerous when repayment requires success: A prudent House can repay even if one voyage loses, one major customer delays, or prices fall moderately.

If every important venture must succeed merely for obligations to be met, borrowing has gone too far.

Watch fixed obligations: Interest, maturities, and repayment continue regardless of whether trade is favorable.

The more debt we carry, the less freedom we possess to wait through a bad market.

Count hidden debt: Include supplier credit, accepted bills, guarantees, deposits repayable on demand, partnership obligations, and commitments made by foreign offices.

Leverage is not only the loan labeled “loan.”

Stress the House: Ask what happens if sales fall, customers pay late, exchange moves against us, one ship is lost, or lenders refuse renewal.

If two ordinary misfortunes together would make payment impossible, reduce debt.

Do not let rising asset prices justify rising debt: During prosperous markets, goods, ships, and property appear to support larger borrowings.

If their value falls, the debt does not fall with them.

Do not borrow to conceal losses: Money borrowed to replace capital already lost can make a weak House appear healthy for a time.

If the underlying business does not recover, the House has exchanged one loss for a larger obligation.

Beware confidence created by success: Several profitable years make principals believe their judgment improved more than it actually did. They borrow more because previous borrowing worked.

Good fortune often teaches the wrong lesson.

Preserve the ability to refuse: A House burdened by debt must continually earn, sell, refinance, and satisfy lenders. It loses the freedom to wait for better markets.

One measure of sound financing is therefore whether the principal can still say no.

My sons, other men’s money can enlarge the House faster than our own savings alone.

Use it where profitable commerce justifies it. Borrow to bridge timing, support seasonal trade, preserve liquidity, and seize opportunities that can be clearly understood.

Know every source of funds and every maturity. Match short debt to short uses and longer capital to assets that take longer to repay. Do not depend upon constant renewal. Maintain several lenders and enough unused credit that one man’s caution does not become our crisis.

When credit tightens, become more liquid before becoming more ambitious.

Above all, remember that borrowed money increases the size of the House’s actions without increasing the size of the family fortune standing behind mistakes.

Debt is a servant when it allows good capital to work harder.

It becomes a master when the House must arrange every decision around the next maturity.

Never borrow so much that ordinary bad fortune can take the House away from you.