Cinium Blog

Debt to Equity: Carry the Right Amount of Debt for Your Business

Good Debt is a powerful tool.

– Robert Kiyosaki – Author, Rich Dad, Poor Dad

Every business carries debt. Debt allows new businesses to get started; it allows established businesses to grow, and it allows big businesses to get event bigger. The challenge for any business is to make sure that it is carrying debt at a sustainable level that helps their business instead of hurting it.

The good news is that even if you’re facing debt issues, it’s still possible to take control of the situation. Here are three ways to get started.

1. Check Your Debt to Equity Ratio

Your debt to equity ratio is a measurement of your liabilities (debts) divided by equity (available cash, the value of your materials, properties, and equipment). While there is no perfect ratio of debt to equity for a contracting business, it is important to look at your debt to equity ratio over time.  If your liabilities continue to outweigh your equity by a greater and greater ratio, it may be a sign that you need to look at your business practices to see whether or not you’re effectively managing your current debt.

This could involve examining how your projects are managed to make sure that you’re getting the maximum profitability from every project. It’s also a good idea to check your back office to make sure that you aren’t losing money due to mishandling of your accounts. Remember, every dollar that you don’t make in profit is a dollar that you can’t use to pay down your debt or use to avoid getting into debt in the first place.

2. Manage Your Debt

For contractors, some kinds of debt can’t be avoided. For example, if a project owner goes bankrupt and can’t make their payments, you may need to borrow to cover your bills. Or if the local economy has a downturn, you may need to pay as little toward your debts as possible to keep your business running.

These types of debt are unfortunate, but they are understandable. However, once things turn around, just paying the minimums isn’t enough to keep your debt under control, it is also important that you address your debts and make an effort to pay your balances.

You don’t have to pay everything off at once, but try to increase your payments so that you’re paying two to three times the minimum. It will help you bring your balance down, and demonstrate to your creditors that you are able to meet your financial commitments.

If you’re carrying your debt on high-interest credit cards, you might want to talk to your bank about a line of credit. The terms are likely to be better, and you can get access to more funds.

3. Convert Short-Term Debt to Long-Term Debt

Another option is to convert short-term debt to long-term debt. One place to start is by financing equipment and making payments over time instead of buying outright. While it may seem counter-intuitive, paying interest over time can actually be beneficial because it allows you to keep your money in your business. This allows you to keep your cash in your company so that it’s available in case of emergencies or opportunities.

While it’s usually a good idea to pay off debts sooner rather than later, sometimes refinancing a loan to stretch out over more time could be to your advantage. While you’ll pay more in interest, stretching a three-year loan into a five or seven-year loan means paying less per month. This can help you to keep up with your payments and keep your business moving in the right direction. If you find you have a cash surplus, you can always apply extra every month to the principal and pay off the loan faster.

Looking for more help managing your accounts and getting control of your debt? Cinium’s Bonding and Cashflow Support Program can help. To learn more, download our free guide, The Contractor’s Guide to Cinium’s Bonding and Cashflow Support Program.

Ready to get started with Cinium? Enroll Today! Or give us a call at 855-424-6486.



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