Debt: Too Much or Too Little?
Debt. Most aviation businesses have some. Some have a lot, and a few have none. It can be very easy to just operate with things the way they are without ever really giving thought to what debt does to the overall value of your company. But the amount of debt you carry can significantly affect how much your company is worth.
How Much Debt is Too Much?
Debt. Most aviation businesses have some. Some have a lot, and a few have none. It can be very easy to just operate with things the way they are without ever really giving thought to what debt does to the overall value of your company. But the amount of debt you carry can significantly affect how much your company is worth. Debt is a necessary part of operating most businesses. Whether debt is taken on in order to acquire new equipment or facilities, is an operating line of credit that you took on when times were tough, or consists primarily of credit cards, most companies have debt.
To determine if you have so much debt in your company that it negatively affects its value, here are a few questions you can ask:
- Does the debt in your company far surpass the equity?
- Do other similar companies tend to have a similar level of debt?
- Are you paying down your debt at a reasonable pace?
- Is it difficult to make payments each month?
Look at your corporate debt closely. If it is impeding your ability to operate well, then you should consider putting a plan into place to reduce that debt.
How Much Debt is Too Little?
If you ask most people, they will agree and say that it is best not to have any debt at all. While having no debt in your company may seem like the best overall objective, it is usually not the best way to maximize the value of your aviation business.
Unless there is absolutely no possible way that your company could expand―into new markets, new products, new service offerings―having too little or no debt at all may indicate that your business is stuck. And that’s not good for its value. If you are considering selling the business in the future, for example, a potential buyer or investor will want to see an indication of where they company can go, how it can expand. And if you grow the company, you will have more to sell when the time comes. Without making that investment, you may be throwing money―that future reward you are aiming to receive―away.
The Right Level of Debt
So what is the right level? It’s a level that enables you to grow without impeding operations. And it’s something you should regularly keep your eye on.
