PROTECTING YOUR BUSINESS
Debt Done Right: Finding the Right Balance Between Growth and Profit
By Jill Odom
DEBT IS A TERM THAT TYPICALLY HAS A NEGATIVE CONNOTATION. IT CAN bring to mind collection companies and possibly even bankruptcy if it is allowed to get out of hand. However, debt can be a useful tool for growing your business when utilized properly.
“‘All debt is bad debt’ is a common mis- conception among people in the industry who are afraid to commit to payments and are willing to grow slower,” says Quint- en O’Dea, owner of Q&A Landscaping, LLC, based in Pittsburg, Pennsylvania. “While this strategy can work, it takes years longer to build a sizable business, and you will miss opportunities.”
DEMYSTIFYING DEBT You may be wondering now what is considered ‘good debt.’ Olin Unruh, owner and CEO of Wetlands Irrigation, based in McPherson, Kansas, advises analyzing potential debt in terms of tangible financial return as a starting point. “Will this debt increase value to our cli- ents?” Unruh says. “Is there a tangible asset tied to the debt? How easily can I liquidate the asset to get rid of the debt? Unpaid taxes are always bad debt.”
O’Dea agrees that good debt is associat- ed with assets that produce more revenue and allow
and allow the company to increase efficiency or grow
wthe company t increas y or gr wservice lines
en out simply t provide relief or a cash crunch,elief ff for a cash crunc which is really
y to provid which is r ow service lines.
est debt or debt that is tak- en out simply
“Bad debt is any high-inte est debt or debtr
“Bad debt is any high-inter- that is ta
just kicking the lack of cash flow problem down the road,” O’Dea says. “Any short-term loans or quick funding options are typically bad debt unless absolutely needed.” Andrew Trower, CPA and founder of
Andrew Trower, M.B.A., C.P.A., says leverage is a valuable tool in the financial toolbox that should never be overlooked. The key is to have your debt-to-equity ratio in alignment. “As long as your debt ratios are adequate
after the new debt, and as long as the debt has a lower interest rate than your cost of capital, you will be still creating economic value even by adding additional leverage to your company,” Trower says. What an acceptable level of debt-to-eq-
uity ratio is depends on your personal goals for your company and the level of stress you are willing to endure. “My rule of thumb is that as long as your
net profit is one and a half times your debt service, you will be fine as long as all other things stay the same,” Unruh says. Trower says landscape companies should strive to keep their debt-to-equity ratio below 2.0. “When the D/E ratio exceeds this amount, it is likely that the company may struggle to meet its debt obligations if profitability takes a downturn,” Trower says. O’Dea encourages not having the yearly
principal and interest payments exceed more than 5-10% of company revenue. If you are in a good position, taking out debt with reasonable interest rates can allow you to purchase revenue-producing assets that can increase your profitability. “I would also be willing to take out debt
for a location for your business or land that will help your business since these will hold their value well and allow your business to grow,” O’Dea says. Unruh acknowledges that any debt is a financial risk to varying degrees. “Stress-test the assumption by having someone not invested in the decision come up with worst-case scenarios,” Unruh says.
24 The Edge //January/February 2025
WHEN DEBT GETS OUT OF CONTROL Unruh has experienced firsthand what a worst-case scenario with debt is like. In May 2023, the bank auditors flagged his credit line at his main bank as substandard. As a result, the bank could no longer lend any additional credit to any of Unruh’s businesses or to him personally. “This was a huge blow to me personally and commercially and was a fact I could no longer ignore,” Unruh says. “I was now facing the very real possibility of losing the business that I had poured my heart into and having to face my team and clients and tell them I had failed them.” He says many factors contributed
to his situation, but the main two were poor growth management and lack of profitability. “I had a grow-at-all-cost mentality and
the entrepreneur’s eternal optimism that said ‘just grow/sell more and these issues will work themselves out’ while ignoring the fact that if you are not profitable, grow- ing just causes you to lose money even faster!” Unruh says. Trower says debt simply gets out of hand when a company becomes overlev- eraged or doesn’t enough income to cover the debt service. O’Dea says it’s important to pay atten-
tion to your current debt level before add- ing more. He notes some owners can want to ‘keep up with the Joneses’ after seeing their competition buying new trucks and equipment. “Grow slow and know your numbers,”
O’Dea says. “Do not compare yourself to other companies and feel the need to keep up with your competitors. Do not get sucked into social media.” Unruh agrees you should be careful about who you are comparing your com- pany with. Instead, compare yourself to where you were a year ago. When a company becomes overlever-
aged, debt can consume all the free cash available for growth. O’Dea says sometimes businesses will have to seek out short-term funding and quick capital loans to cover essentials like payroll and supplier bills. “When debt gets out of control, companies can experience increased financial risk because it becomes more
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