Is having company debt bad for business. It’s all about the plan.

When speaking with business owners about debt financing it is always very interesting to hear all the varied ideas about having company debt. When thinking of my past acumen, in which I started or purchased seven different companies in three different regions of the country. I would grow them, get bored and sell them or close them over time. I funded each company differently. At the age of 28, the first company I owned was a high-end men’s clothier store and I structured the purchase using an SBA loan.

Today, when I think of debt and the purpose of it, I come to the conclusion that there are two reasons to occur company debt. The first is for growth. Using debt to fund an acquisition, to grow your business and increase your sales is a smart move, but it must be done correctly. The most important thing you need is a plan. Debt should never be undertaken without a well thought out business plan. If the plan is through it will spell out the reason the debt is needed, the amount of debt that is needed and the cost at which you can carry that debt. I see over and over again companies making acquisitions or taking themselves privately and straddling their company with a massive amount of debt that they were unable to carry. Spending time developing a well thought out business plan is money and time well spent.

The second reason to incur company debt is for survival. No matter how good your planning process is there are always little unexpected surprises that arise during the year. A good business plan tends to minimize these occurrences, but in the end, some of these unexpected things do occur which tends to either decrease sales or increase your companies’ expenses. 

Once your company has made the decision to occur the debt the next important task at hand is to properly manage the debt. You cannot incur debt without a debt management plan. This plan should include the following; a companies’ total debt schedule, the overall cost of carrying your total debt load, your new debt service coverage ratio and any future financing needs over the next five years. 

So, in summary, you first need a well thought out business plan addressing the need for the debt and its impact on your sales and growth projections. And next, you need to develop a debt management plan addressing your current level of debt including the new debt, the overall cost of your debt, your new DSCR, and any future required debt over the next five years.