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Apr 20, 2011 - 2 minute read - Comments - entrepreneurship

How much Debt to Take? A Golf Analogy

A common topic of discussion with my clients is how much debt is the right amount. This is a big question. Not enough debt can restrict your growth and too much debt can destroy your business. How can you tell if you have too much or too little debt? Since it’s the start of golf season, how about a golf analogy?

The new Taylor Made R11 Driver. Like a loan, capable of delivering breathtaking power and massive destruction.

A loan is like a high tech, long distance driver to a business. When used properly, it can add distance to your game and lower your score. It can’t, by itself turn you into a better golfer. In fact, a top tier driver in the hands of a wild golfer will increase scores because the off-center hits will result in even wilder misses.

In a business, if you have solid revenues and have good control over your costs, debt can be a great way to make your investment work for you. The increased power the loan provides will greatly benefit your bottom line. If you have fluctuating revenues and are subject to wide fluctuations in costs, the increased power of a loan can wreck you if you can’t make your payments.

The one point where this analogy breaks down is the role of the banks. Yes, they are selling you the loan (driver), but they aren’t overly concerned with your score. It’s more like they are renting you golf balls. As long as you return them at the end of the round (interest and principal payments), they don’t care if you shoot 70 or 105. Hopefully this analogy sheds a bit of light on how your debt structure affects your business. Until next time, keep it in the short grass!

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