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When I create a thread, I typically try my best to craft it in a way to bring value to the rest of the forum. This thread is a little more self-serving than usual, but I hope that you will either learn something or be able to answer my question.
Recently in my INSIDERS Progress Thread Buying a Construction Business and Adding Exponential Value, we have been talking a lot about the process of obtaining business loans to purchase an existing business. Something that does not get discussed much on this forum, but still has it's place.
For some of us, starting a business from scratch may not be the best option.
Maybe you are better taking something existing and adding value. Maybe you have a lot of money but are short on time. Maybe you have a family to support and have a hard time transitioning from your job because you need to maintain your lifestyle. Whatever the reason, starting something from scratch is not always the best answer.
That being said, it is important that we have a conversation about business debt.
I have some questions of my own that maybe you can help me answer.
More often than not you will probably be, or are currently using some sort of leverage in your business. If you are not, you could be missing out on opportunities to get a better ROE.
But how much debt is too much?
Does it only become too much when you are not able to pay back your lender, supplier, or family member?
Or are there guidelines to follow to make sure that you are not treading water in the danger zone?
During my research I haven't found much content on business debt. What is good vs. what is bad.
In a typical SBA loan transaction, the bank carries a note for 75%, the Seller for 15%, and the buyer for 10%. Which brings the buyer to a debt/ equity ratio of 9/1. For every dollar you have in equity, you owe 9.
When analyzing this scenario, you would think that this is an extremely over-leveraged situation.
Or is it?
For an SBA loan, banks look at the debt coverage ratio or the ability for a business to pay back a loan. They typically want to see a debt coverage of 1.2 times net profit.
If the loan payment is $80k per year, they want to see $96K in net profit.
Analyzing this from a debt coverage ratio perspective does not seem too bad.
The world of borrowing money can be confusing. It is especially less clean cut when you are doing it to make money.
Good debt is when you borrow money to make money right? I don't happen to think so. If it was "good" it would ALWAYS be good to borrow money for the purposes of making money. But it is not always good.
So here is my questions (and I no that it is not black and white).
How much business debt is too much???
I hope you are all having a great day.
Thank you.
EDIT: Math
Recently in my INSIDERS Progress Thread Buying a Construction Business and Adding Exponential Value, we have been talking a lot about the process of obtaining business loans to purchase an existing business. Something that does not get discussed much on this forum, but still has it's place.
For some of us, starting a business from scratch may not be the best option.
Maybe you are better taking something existing and adding value. Maybe you have a lot of money but are short on time. Maybe you have a family to support and have a hard time transitioning from your job because you need to maintain your lifestyle. Whatever the reason, starting something from scratch is not always the best answer.
That being said, it is important that we have a conversation about business debt.
I have some questions of my own that maybe you can help me answer.
More often than not you will probably be, or are currently using some sort of leverage in your business. If you are not, you could be missing out on opportunities to get a better ROE.
But how much debt is too much?
Does it only become too much when you are not able to pay back your lender, supplier, or family member?
Or are there guidelines to follow to make sure that you are not treading water in the danger zone?
During my research I haven't found much content on business debt. What is good vs. what is bad.
In a typical SBA loan transaction, the bank carries a note for 75%, the Seller for 15%, and the buyer for 10%. Which brings the buyer to a debt/ equity ratio of 9/1. For every dollar you have in equity, you owe 9.
When analyzing this scenario, you would think that this is an extremely over-leveraged situation.
Or is it?
For an SBA loan, banks look at the debt coverage ratio or the ability for a business to pay back a loan. They typically want to see a debt coverage of 1.2 times net profit.
If the loan payment is $80k per year, they want to see $96K in net profit.
Analyzing this from a debt coverage ratio perspective does not seem too bad.
The world of borrowing money can be confusing. It is especially less clean cut when you are doing it to make money.
Good debt is when you borrow money to make money right? I don't happen to think so. If it was "good" it would ALWAYS be good to borrow money for the purposes of making money. But it is not always good.
So here is my questions (and I no that it is not black and white).
How much business debt is too much???
I hope you are all having a great day.
Thank you.
EDIT: Math
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