“The Age of The Golden Noose”

Escaping The Illusions of  Debt

There’s a perception prevailing today on several sides of business debt. You need to understand its symptoms and how it affects your business and future. It’s a symptom called spatial disorientation, the same misperception an airplane pilot may experience during low or no visibility. When it occurs — up is down and down is up — causing a high probability for things to… “CRASH!”. Today, corresponding business disorientation is occurring from business debt levels, with the horizon for returning to normalcy difficult to see.

Debt has been perceived as a quick cure for business expansion, but highly leveraged acquisitions, new equipment, technology or facilities, now have become business life-threatening. In retrospect, sound business judgment related to debt became distorted by the euphoria of the defined horizons we perceived. The same debt we placed on the business when we thought we had a clear vision, now has severe consequences to business health. Debt, in other words, has become a Golden Noose around the neck. As the economy languishes, we’re about to find out that more and more of these Golden Nooses tightening — sometimes without warning.

Times of crisis have a tendency to provide us with significant learning opportunities. Debt was easily accessible, over-subscribed and an over-utilized device to resolve symptoms, rather than corrected root causes. Once considered an ally in profitable growth, debt has become a insidious constrictor.

The realities that heretofore revolved around adjusted cash flow are now clearly focused on “pure” cash flow and capital ratios – particularly debt to equity. No more will an owner be able to add debt without injecting equity as paid in capital or earnings. Even more disturbing is paying more taxes to make the business healthier. We all must become better debt stewards.

Bankers in this new Age are driven to better manage risks and returns and require capital infusions. The days of pocketing the capital from your business, without adding equity or additional paid in capital are gone. A banker’s mindset is necessary for survival. The January 2009 Federal Reserve Board Senior Loan Officer Opinion Survey - Commercial & Industrial Lending Sector Report lays down some rules:

• Reduced maximum size and maturity of loans or credit lines
• Tightened general lending standards & pricing terms
• Reduced tolerance for risk as industry specific problems worsen
• Increased spreads of loan rates; increased use of interest rate floors
• Tightened covenants across all loans

So what can we do about it?

Well to start, planning one’s way out of any problem leads to options. The planning dialogue must be had with someone who financially understands the realities of this new Age of the Golden Noose. A debt diagnostic is in order here for every privately-held business in America. My first insight is: “Embrace what you most resist.” And get an assessment done of your debt by a professional advisor.

With all the pressures we face owners tend to become the best “fixers”. The consequences in the Age of the Golden Noose dictate that decisions of debt will re-shape our business destiny. And therefore my second insight is: “Get re-oriented around business value.” Performing a simple valuation can be an effective baseline to measure future progress.

Who is in charge of finance? Everyone. If those others aren’t helping — either ask them to help, or to move aside. What I am suggesting is that your business, now more than ever, needs more eyes and hearts in it at every moment. Less debt helps immensely. So being proactive and engaging team members by educating them on the Golden Noose is crucial to thriving in the future. My third insight is: “Get everyone engaged in cash flow.” Educate and use resources you already have in your business to effect financial performance.

No time here for excuses… and denial is the first step towards downfall. When you habitually think in a certain way, everything looks the way you think. So my fourth insight is: “Get conscious of the way you think about debt.” Treat the anxiousness created by a lack of business visibility as a friendly messenger. It’s time to view debt with a different mindset.

Privately-held businesses will continue to play a major role in re-vitalizing the American economy. The prosperity of our nation depends upon our resilience and innovation. We must get healthier on our balance sheets and acknowledge — up is up and down is down – to escape both the Golden Noose and spatial disorientation in order to re-discover the horizon of normalcy.