Debt Is Not a Four-Letter Word

Growth during a recession is not an absurd idea

Electrical contractors are a debt-resistant group. Past and future company leaders often clash over whether to assume debt. The former is proud of having no debt, the latter knows that it’s a tool for growth. Who is right?

They both are. Only a few decades ago, houses were bought without mortgages and credit cards didn’t exist. Today, we’re urged to add equity loans to our mortgages to clear up unwieldy credit card balances. We no longer believe debt is a dirty word, and almost anyone can borrow money somewhere, somehow.

Financial gurus will tell you that remaining debt-free limits growth and drains cash. The increase in bankruptcy filings proves that the fastest way to kill a company, other than doing the wrong jobs and failing to collect on invoices, is taking on too much debt.

Managing debt is a balancing act—you carry enough to take advantage of great deals and early payment discounts without digging the hole so deep that it swallows the whole company.

Pay attention to your debt-to-equity ratio (debt divided by equity on the balance sheet). The closer it is to $1 in debt for every $1 in equity, the less risk you show to a lender. At 2.5 to 3.0 or higher, you don’t own enough of your own company.

Banks are still your primary source of funds, but asset-based lending has given way to cash flow. All of those toys you own are worth less as collateral than a liquid balance sheet (plenty of cash and collectible receivables newer than 60 days). The bank doesn’t want to take your equipment, cart it away, and auction it for pennies on the dollar. Just show it the money. Retainage counts for nothing, so there’s another argument for negotiating it out of your projects (yes, it’s possible).

Your lending officer is probably going to a committee for all major decisions, and your bank may be on the verge of a merger or acquisition. Either way, construction lending stops cold. Ask my friend whose family business was denied a modest increase in credit from the bank they dealt with and paid promptly for 40 years. If you’ve got unused lines of credit, you might want to tap the money and put it away somewhere before the rules change.

The basics still apply. The type of debt and length of repayment cycle should match the useful life of the asset it supports. For example, your line of credit is meant to fill gaps in cash flow, when some invoices are paid a bit late by your customers or you want to pay vendors early to take advantage of a discount. It is not meant to pay for your new building.

Mortgages support buildings, which are meant to last for decades—long enough to serve as collateral for a 30-year loan. Five-year equipment loans fund assets which are meant to last more than a couple of years, but less than a decade under normal use.

Look for alternate sources of funds, such as venture capitalists or other investment groups. Electrical contracting has become profitable enough to attract them. Vendors, especially equipment manufacturers, are often willing to finance purchases. The first and last source of cash is always the owner, if he or she has kept some of the return on investment and is willing to lend it back.

Factoring can be a great short-term solution to a cash flow crunch, if your customers are solid, and your profit margin can cover the fee discount (roughly 2 to 8 percent). The factor buys your receivables for cash, net of retainage, old accounts and the discount. Be sure to let your customers know they’ll be paying the factor directly, so they don’t mistake it for a bankruptcy trustee.

Dividing debt by total assets (debt ratio) will give you a quick idea of how leveraged your assets are. More than 60 percent is a warning level, especially if those assets will soon need to be replaced. With interest rates low, it’s tempting to increase that debt burden. Just remember that when rates go back up and cash gets tight, many contractors refinance on extended terms (like paying your Visa bill with an equity loan). Refinancing current debt on increasingly extended terms and continuing to load on current debt is one of the most common ways to kill a business.

If you want to grow your revenue between 15 and 20 percent next year, and you can borrow at a maximum rate of 10 to 12 percent, then borrow the money and grow. Growth during a recession isn’t an absurd ideal. As other contractors disappear, and you’ll be there to pick up the slack in the market as the economy turns the corner. Someone always grows and prospers in any market. Make sure it’s you. EC

NORBERG-JOHNSON is a corporate trainer for Anthony Robbins & Associates, a former subcontractor, and past president of two national construction associations. E-mail her at


About the Author

Denise Norberg-Johnson

Financial Columnist
Denise Norberg-Johnson is a former subcontractor and past president of two national construction associations. She may be reached at .

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