Is Your Business Over-Leveraging or Under-Leveraging Debt?

It’s a simple, but important question.

There are many important variables and tools that go into building a business. People, product, service levels, marketing messaging, culture, financing – just to name a few. In the middle of the ever-complex challenge of operating a business the question of over-leveraging or under-leveraging the business can be a difficult one to answer.

In some cases, it’s possible to restructure and refinance debts in order to free-up cash flows. But for others, over-leveraging their cash flows or collateral means there are few alternatives to slowing growth, turning away business, and paying down debts out of existing working capital. Even worse, some companies are borrowing the maximum that they can in terms of cash flows and credit worthiness. Even if they wanted to, borrowing more money and using it to expand or grow is not an option.

Some substantially under-leveraged companies are in the completely opposite situation. If they wanted to inject capital onto their balance sheet there are plenty of opportunities to do so. And in some cases, the fact that they haven’t is restricting growth.

Questions about leveraging your business:

If you are under-leveraging your business, there are a few key questions to ask yourself:

1. How much money could you borrow, at what rates, and over what terms? If you “maximize leverage,” taking full advantage of the company’s cash flows and assets, how much money could you obtain?

2. If you obtained this money, what you would do with the cash to grow your business?

3. Do the potential benefits of using borrowed money to grow your business outweigh the risks?

Leveraging yourself to the hilt is not the goal of this exercise. It’s to help you determine the acceptable level of risk for obtaining your growth goals. Learning to make decisions like a Chief Financial Officer would for a large company is to start managing your business from the balance sheet instead of solely from the income statement. We all know that the income statement is important, it’s where we can track sales and monitor our expenses and profitability margins. However, you track your wealth on a balance sheet, and the equity growth in your business is the financial health measure.

Borrowing Money:

If you can borrow more money, and have a good idea what you can do with it — come up with three scenarios:

1. What is the worst that would happen? If the investment is a disaster and doesn’t generate incremental revenue – what would happen to your cash flows as you pay off the debt?

2. The other side of the coin is the home run scenario. If everything worked out perfectly, how much incremental profit would you generate, and how quickly could you pay down the debt?

3. What is the “most likely scenario”? It’s most likely something in the middle between home-run success and abject failure.

Sometimes working through this exercise can unlock whole new ways to think about aggressively growing your business.

Whether you are seeking financing to grow your revenues to the next level, or you are just starting, North Texas Loan Advisors, LLC has the professional experience and expertise to help you successfully determine the level of leverage you need in your business.

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