Many companies have been making a profit over the past few years. As a result, they have generated quite a bit of liquidity. With the banks calling on them offering tons of cash and low interest rates they are faced with the decision of either to pay down their company debt or borrow more?
Company Debt: Pay Down or Borrow?
Given the financial crisis of the past four years is now the time to increase leverage or reduce it? Warren Buffet has been quoted as having said that most companies borrow money in the good times and try to pay it back in the bad times when cash is tight. He says you should do the opposite. Borrow in the bad times when opportunities abound and pay back their company debt in the good times when cash flow is strong.
So given where the economy is do you borrow or pay back the your company debt has? Is the economy strong or weak? Are we nearing the top of the recovery or do we have many more years of improving financial performance?
I would say we are halfway to two thirds into the recovery depending on where you are in the country. If you are in Houston things are starting to get hot! So should you start paying down debt?
Pay Down Company Debt
We are recommending to our clients to start paying down their short term lines of credit. Now is the time to start preparing for the next downturn. It may be years away but it is not to soon to make your company a fortress! We anticipate the economy lurching from growth to contraction for the foreseeable future.
What About Banks?
So what about the banks? It is hard to walk away from cheap money. Our strategy is to borrow long term money against long term assets. Lock in to those interest rates for as long as possible. If you can get 5 to 10 year money against real estate do it!
Given the nature of the world economy, volatility and risk is the new paradigm. Reduce your company’s exposure to those risk and grow prudently!
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