Action Plan Online 2010, Part 2 of 12

To Borrow or not to Borrow?

Shakespeare once wrote that “borrowing dulls the edge of husbandry,” and after the recent turmoil, thrift is suddenly back in style. But taking advantage of low rates could bump your business ahead. The decision on whether to borrow should depend far less on interest rates than on what you intend to do with the money. Doug Reid, an associate professor at the Queen’s School of Business who has organized a course on recovery planning for business owners, explains three key things to help you decide if taking on debt will put you farther ahead.

Stop panicking!
If the recession was good for anything, it exposed many businesses’ weaknesses. And while some just needed “to be taken out behind the barn and shot,” Reid says – an accurate, if painful, assessment – others just need to reassess and develop a new long-term plan. “A recession is a psychological event,” Reid says. “Most people are dealing with circumstances they haven’t seen before…decision making collapses, and they stop thinking, ‘where do I want to be in a year,’ and start thinking, ‘will I be here in a month?’ But it is vital to talk about the future.” You should know where the holes are now. Fix them and move on.

Stand out from the crowd
If you are going to invest money in your business, borrowed or otherwise, invest it in ways that will help you stand out from the competition. “This is exactly the time to behave differently than other competitors,” Reid says. Two main ways to do that are R&D and marketing, which has the most impact when it is not drowning in other messages. “If it is silent, you have less competition,” Reid adds.

Check your poker chips at the door
Now is not the time to rely on your gambling instincts. “If anybody takes on borrowing for efforts around recovery, it is higher risk, which means they must have more confidence about how their choice fits into the overall plan. They must perform much more due diligence,” Reid says.

RELATED LINKS
Action Plan 2010 in Print, Part 2 of 12: Time to Borrow or Refinance?
Throughout the recession, optimists have been happy to point out the benefits of recession to struggling business owners. Most of this advice has included “wait-and-see”: after the downturn, your weaker competitors will be winnowed out, formerly astronomical expenses will return to earth and the market will be yours for the taking. It’s good advice, but you must do much more than sit back and wait to reap the rewards of perseverance. More >

Reviewing the competitive landscape

February’s Action Plan Podcast:
Frederick Innis, partner, Osprey Capital, on refinancing.
To listen, click here.

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1 If you can quickly offload assets if interest rates rise, debt is more feasible. 2 Only use debt for expansion if there is a quick payback. 3 Leverage is your friend if you find the sweet spot between risk and reward. 4 If you want to expand, consider alternative deal structures over debt. 5 Keep your debt to a minimum by acquiring a distressed company: there’s no reason to pay top dollar.