Debt – Life or Death?

Much has been written about the difficulty small businesses have had obtaining loans. 
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Whether credit is easy or difficult to obtain may not be as important as understanding what happens when the credit has been obtained.

​Let’s flash back to 2005 – 07 and consider what might have happened to a loan to buy say a bulldozer.

Remember 2005 -07?  Times were good particularly in the real estate industry.  Houses, shopping centers and all sorts of commercial buildings were in the works.  Lots of dirt had to be moved so lots of dirt moving equipment was needed.  Suppose you bought a dozer back then and didn’t look forward?  You probably did your homework and could economically justify the purchase.  (Sure you could have leased, but this is about buying.)

For a while, cash flow made making the payments easy as you had figured.  BUT, then came the bust.  OK, you had enough backlog that the payments were still covered.  BUT, a few months in, the backlog was absorbed and the payments started to be harder to make.  At some point you may have made the decision to either get behind with the lender or ask for a refinance.  Facing a problem loan, the lender may have agreed.  So what happened…unfortunately you bought a little time without solving the problem.  (To add interest, suppose this isn’t your only loan.)
 
A few more months go by and cash flow is really beginning to shrink.  Unfortunately the cash consuming obligations are still there.  Maybe you wonder if the lender(s) will let you go on an interest only program for a while until the work picks back up.  So, you ask them and amazingly they agree.
 
Problem solved this time…right?  Not so fast.  Since you’ve had trouble making your loan payments you’ve probably had trouble making other payments too.  Actually you’re probably behind on everything including (I hope not) payroll taxes.
 
Finally work flow starts to improve.  Jobs that were on hold start up again, you can use the bulldozer rather than just feed it and you can actually pay for it again.  Or can you?
Remember the interest only deal?  How many more deals like that did you make? How many suppliers and other creditors now expect you to make good on your promises?  How do you plan to make good?
 
You might be tempted to say “I wish I hadn’t bought that dozer.”  Wrong answer.

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