The Right Debt Mix

The question of whether debt increases or decreases a company's value has no one-size-fits-all answer, but here are some guidelines as you think about your own company.

Tweet

The question of whether debt increases or decreases a company's value has no one-size-fits-all answer, but here are some guidelines as you think about your own company.

Do you anticipate doing an initial public offering or selling your company within the next three to five years?
If so, then you've little choice but to ratchet up the company's growth rapidly -- which means that a credit line probably is essential. If your company is too new or too small to qualify for a credit line on its own, look for ways to pair an equity financing deal with a bank loan. (That strategy is increasingly possible, especially for companies who land investments from established venture capitalists, private equity funds, or repeat angel investors with contacts in the banking community.)

Is debt justifiable?
If your company's lack of funds stems from cash flow problems that require corrective measures (perhaps in your accounts receivable or payable systems), don't expect an outsider to applaud your unnecessary borrowing.

Are you running a fast-growing service company or a company with few assets that can serve as collateral?
Then you're in a bind. You probably could use some debt, but unless your personal financial position is very strong, it's unlikely that you'll be able to persuade a banker to give you a loan. Instead of relying entirely on equity deals to bring capital into the business, pursue other sources of financing, with the goal of moving to a traditional credit line as soon as you establish a track record and a cash flow stream. (Consider starting with a credit line from your credit card company or with a contract financing deal from a nonbank lender.)

Can you control your company's hunger for capital?
That should be a major concern for any growth-oriented company. Although some debt is good, too much can be catastrophic. "If you owe too much, or if it's coming due sometime soon and a prospective buyer would have reason to worry, then debt can be a big strike against your company," says John J. Egan III, a partner at law firm McDermott, Will & Emery in Boston. So walk the line between abstinence and self-destruction -- ideally by layering both debt and equity arrangements into your growing company's capital structure.

Copyright © 2000 G+J USA Publishing

Read more:

Sign-up for our Finance Newsletter

Email Address: