‘About Debt’ Q&A Series: Debt or Equity — Which is Best to Grow Your Business? (Part 5)

Our ‘About Debt’ Q&A Series has finally come to an end with part 5, the last article. Thank you to our readers who have been following the series! We hope this series has been helpful for you and we look forward to coming back with new series. This week, let’s learn more about how much a company should borrow to grow their business!

Q Sandra: “Let’s say that I’m an entrepreneur who runs two branches of coding schools and based on market demand I feel like I can open two more centers. How do I know how much I should borrow for my company’s expansion?”

A Chi-Ling: “A company should only borrow as much debt as the cash flows of the company are able to support. Remember we keep saying that all debt is bad debt if you can’t afford it. So companies that have too much debt will find it difficult to grow. This is because of the high cost of servicing that debt. Regular steady cash flows are required to pay interest and principal on the loan and have to be budgeted for. So if you borrow too much debt and you don’t have a plan to pay it back, that turns good debt into bad debt as much as the underlying asset was intended to increase income.

So for us we would need to take a close look at the company’s projected cash flows, we would need to do a little bit of analysis on whether those cash flows could support that service under a variety of downside scenarios. And then we would work out what is the optimal or best level of debt for that company to take on. So if a business has seasonal or fluctuating revenues and they are highly volatile then it is going to be a bit more difficult to guarantee that there is going to be enough cash to meet that service.”

A company should only borrow as much debt as the cash flows of the company are able to support.

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