While money has been cheaper compared to some long-term capital, there’s been a school of though to line up as much debt as possible during these times. Part of the thinking is that debt can be the cheaper form of the cost of capital, cheaper than equity.

I used to hold that view. However, now, I go against the grain and am a big fan of trying to get your debt paid of sooner, rather than longer.

It may be a cheaper cost to capital, but it’s still capital that’s required. It’s still capital that has to have payments on it. It’s still capital that could put a squeeze on you if things get tighter at some point. It’s still capital that you have to payoff when you go to sell your company.

Rather than getting tied up with a lot of long-term debt with fixed payments, that right as you break even point, I’m a bigger fan of lining up debt capital that you only tap into when you really need it. You can still provide some of that buffer against times when you may have some fluctuation in your cash, times where maybe operating results aren’t quite what you expected. But you have that support without having to lock yourself into a fixed commitment of payments every month.

What if you do have some debt now like this on the books for term loans or otherwise? Consider paying them off quicker. Perhaps, you can make double the payment each month or add some significant amount to the payment that you make, so that you amortize the debt down faster.

Over the long run, I think you’ll feel better without having that debt on the books and you save yourself the interest expense on the P&L.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value