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Leveraged Debt Financing

It is very typical for a company to come to a point where it needs additional capital to pursue the investment opportunities necessary for its next steps in growth. When a company reaches this point the business owners need to decide whether they will finance the transaction through debt or through offering a portion of the equity they have built in the company. Both debt and equity offerings have their up and down sides. Today we will discuss the debt option.

It is important for businesses to be cautious when they are making the decision to take on additional debt. Often times the bank will be willing to finance a project based on the financial statements when there is a myriad of problems that could only be foreseen by those directly involved with the project. It is important that those involved use their own judgment and analysis before accepting the debt offered by the bank. In my own personal situations I always like to ensure that there is enough money in the bank after accepting the loan so that I can make a few months payments, at a minimum, if something goes wrong.

On the up side, financing a project through debt allows the owners to keep all of their equity in the business. This is sometimes beneficial for those who believe they will need to have as much equity in the business somewhere down the road. During the most recent years of 2009 through 2012 the interest rates are so low that debt financing is particularly appealing because the borrowed money in nearly free. Like what was previously mentioned, if you are certain that you can make the payments and keep from falling into bankruptcy, then debt financing may very well be an appealing direction to take for your business.

Troy Jenkins
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