“I like my players to be married and in debt. That’s the way you motivate them.”
Debt securities have always played a major part in financing a company’s growth and maintaining cash flow in times of growth as well as retraction. During this time in the pandemic, our government is starting to play an even larger role in getting companies to increase their debt loads through programs like PPP and the Mainstreet Lending Program. As of mid-2020, interest rates, both for these government programs as well as with bank-financed and venture capital, are historically low. It’s easy — maybe inevitable? — to add low-cost debt to your company’s balance sheet and capital structure. But at what level does debt become detrimental to the immediate future of your company?
Contrary to many businesses, a few of our clients are actually paying down existing debt on their books. One business owner is selling more of their product online and experiencing a major shift in their business model. As a result of stronger cash coming in, management is electing to pay down debt to make her company more available, i.e. creating potential for equity or securing a larger debt offering with more attractive lending terms.
What is the right approach for your company?
As you might expect, our answer is it depends. It’s really important that, even in this uncertain time, companies make sure that the operating performance of their business will withstand the impact of our pandemic.
The government programs under the CARES Act and other pending Acts will not last forever — and there will likely be higher inflation and/or tax rates in the next three to five years because of the increased amount of government funding.
Here are two schools of thought for companies to consider:
When evaluating which path to choose (expanding debt or paying down existing credit lines), each business owner needs to ask themselves these three questions:
Takeaway: Businesses often need an outside perspective to help analyze and interpret the best path for their company’s future strategies and objectives. For a free assessment of your financial situation and potential path to follow, please contact us at firstname.lastname@example.org.
Co-founders & Managing Partners