If you have acquired debt the last couple of years, you may be concerned about making sure the debt load does not sneak up on you.
Debt can be a serious issue for just about any type of company. But construction businesses are particularly sensitive to cash flow fluctuations, so giving up too much flexibility to debt could really hurt you. Fortunately, there are ways to grapple with how much you owe and stay competitive.
Make it a priority
The first step toward maintaining an awareness of your debt is to make it a priority. It is easy to put it on the back burner as you work to complete your projects and look for ways to stay competitive in your market. On at least a monthly basis, discuss debt in your management meetings. Even if it's just to say, "Nothing has changed," the topic will keep you focused on debt and may even spark some ideas for minimizing it.
Also discuss your company's debt-to-equity ratio. This value can generally be defined as your total debt divided by its equity. The lower your ratio, the better poised you'll be to pay off current debt and take on any additional debt, if necessary. Work with your CPA to calculate this ratio and consult with your banker to obtain an acceptable limit.
Beware of workouts
If your debt truly hits a breaking point, talk to your lender and see what options are available. You may want to consider structuring a "workout" that will relieve the debt without forcing you to declare bankruptcy. This could include a temporary forbearance, adding missed payments to your loan balance (so you catch up on them later) or extending the loan's term.
One word of warning: If you and your lender agree to restructure the debt, you may incur taxable cancellation-of-debt (COD) income for recourse loans or capital gains for nonrecourse loans. For instance, a reduced loan principal may trigger COD income. The rules in this area are complex, so be sure to discuss the tax implications of a debt workout with your CPA.
Manage the necessity
Many contractors depend on debt as a source of liquidity to keep their companies running smoothly. But, even if it is a necessity, debt must be managed and shouldn't be ignored.
