Striking the Balance

The Bottom Line: While obtaining business financing is easier than ever, companies must carefully evaluate the amount of debt they can safely manage to avoid the risks of excessive leverage and ensure long-term stability.

Getting business financing is much easier than it ever has been. As a business owner, you have several ways to get as much debt as your company can handle.

While getting financing is easier now, we all know that just because your company qualifies for financing doesn’t mean that it’s a good idea to take it. Actually, it could be a terrible idea.

Deciding how much financing you can safely take is very difficult. This problem affects both large and small companies. Just look at the number of professionally managed companies that go bankrupt due to excess leverage. Here are some considerations for getting business financing.

Is there a magic debt number?

No magic number or formula applies to every company and circumstance. In fact, most estimates of “optimal debt” don’t consider that conditions can worsen quickly. This oversight makes these estimates suspect.

Let’s look at this situation from a different perspective. Small and midsize construction company owners have two competing objectives. They want to stay in business for a long time. However, they also want to make as much profit as possible.

Growing aggressively while also staying in business for a long time is nearly impossible. Look around at your fellow construction business owners. You will likely find that there are “old” CEOs and there are “bold” CEOs. There are few, if any, “bold and old” CEOs. There is a reason for that.

Debt is a double-edged sword

When used correctly, debt can increase potential profit or returns, but the growth and returns come at the expense of safety. This is why debt is always a double-edged sword. Higher levels of debt reduce your ability to manage unexpected problems.

This is also why companies with the most debt are the first to fail when things go wrong. Burdened with so much leverage, they have few options except insolvency.

The purpose of debt

The simplest way to evaluate debt is to look at its purpose. Debt can serve two purposes. It can be used to help your company stay in business or help you grow the business. In some cases, debt can accomplish both objectives, though this is seldom the case.

1 | Stay in business

This type of debt is needed to remain in business. Here is an example: glass fabricators frequently use financing to replace obsolete machinery. Machinery is a large-ticket item that few companies can afford without financing. Consequently, you have little choice; your company needs the machine, and financing is your only way to get it.

2 | Grow the business

Debt used to grow the business is deployed to increase your return on equity, market share or revenues. This debt is not essential, though it is used for growth. Examples include financing a new product line or a corporate acquisition.

In the 2024 Top Glass Fabricators Report, 16% of respondents are considering acquisitions as part of their growth strategy. Acquisitions typically carry a high level of debt and risk. This level of debt leaves them susceptible to problems if things don’t go as planned.

Strategy for longevity

Implementing a strategy for longevity is simple. It’s a matter of being conservative and deliberate in your approach.

1 | Consider “good enough”

Most company managers want to grow as much as possible; ideally, as quickly as possible.

Instead, set “good enough” growth as your objective. Contrary to popular belief, there is nothing wrong with well-executed but good enough business growth. It allows you to plan carefully and be selective about the growth opportunities you pursue. Consequently, you can avoid risky opportunities.

2 | Minimize debt

Use the least amount of debt you can safely get away with. Some debt may be necessary to remain in business. Everything that goes above and beyond the need to stay in business is optional. Consequently, you can be selective.

3 | Use high-quality financing

Always get high-quality financing that matches your objective. If you have questions about this approach, work with your finance team, a consultant or a CPA.
Read your loan documents carefully. Consider working with an attorney if you are not comfortable reading loan documents.

4 | Finance safe growth 

Use debt to finance only those growth opportunities with a high safety margin. These opportunities usually have a substantial upside but only a small downside. Consequently, your odds of success are good. Lastly, never use debt to the point it could jeopardize your whole company if the opportunity fails.