The opinion is by the author himself.
I was in the financial world for my entire career. After that, I ventured for myself and started a PE company focusing on tormented companies. Essentially, I rebuild a struggling company into an efficient and profitable asset.
Debt can create opportunities to change the game when used properly in a stable economy. Meanwhile, misused debts can destroy otherwise great companies, especially in a volatile economy.
The harsh reality is that debt is a dangerous tool. I personally like it, but I understand it, and my risk tolerance is probably much higher than most. I also use my debts on the Safety Net. This means I have my own money and my investor money, so I can make much less measured, non-emotional decisions.
Estimation of debt
Secret secrets that effectively use debts are multifaceted.
Of course, the most important part is to ensure that your business can still serve your debt, even when you are facing a significant reduction in revenue. This is a potential scenario for slower economies.
Too many management teams have made the mistake of assuming that they are immune to market conditions due to market control, their own technology, or, in many cases, very large rog arrogance. Unfortunately, when the tide changes, those who do not properly manage their debts often find themselves sucked into a death spiral that they cannot afford to die. It causes collection activities that destroy the company and force it into bankruptcy.
CFOs can avoid this situation by employing an almost “startup” mentality where almost all costs are carefully analyzed. If that's not absolutely necessary, then you should avoid creating additional debt in today's economy.
Beyond that, you should only use debt in very specific scenarios.
For example, now is not the time to make a big speculative move. Instead, use your debt on certain (or as specific as possible) opportunities to provide an aggressive profit margin. One use case that meets the criteria is the purchase of raw materials or equipment necessary to meet large orders from economically stable customers who are unlikely to default or pay slowly.
A more speculative use case is to attract competitors with an established customer base and consistent cash flow. In particular, your company can leverage existing operational efficiency to work at a higher profit margin. However, this should be approached very carefully, as there may be hidden landmines in your target business. The key is to carry out thorough due diligence and get a full understanding of what you're getting. Acquisitions can be a transformational opportunity, especially in a volatile economy, but only when approached strategically and carefully.
Convince a lender
When trying to land debt financing, the key is to understand what your lender or lender is looking for and coordinate your presentation to provide the information they are looking for. Beyond that, you need to show them why your company is a good investment, not just a safe investment. They frame it from their perspective and clearly show how it benefits them, and match not only with their business but with other clients and initiatives. Understanding the needs and concerns of lenders will help you stand out from almost every other borrower.
For example, borrowers should understand that lenders have different risk profiles. Let's say their advantages are 7% and their drawbacks are losing everything. This is unlike stock investors who have unlimited benefits, although risking losing everything.
Also, as a CFO, remember that perhaps close to 100% of lenders have more information about their business and industry than ever before. It does not mean lying, nor does it mean that anyone will be misleading.
