The economic situation for the middle class is currently outstanding – despite the weakening economy. Many companies have sufficient liquid funds to pay investments from their own assets. But is this really the best option? A plea for debt financing in good times:
“Buy only what you can pay for.”
A wisdom that many parents and grandparents have given the children and grandchildren on their way to their own lives.
Quite good advice, but like so many tips, not valid in general. Especially entrepreneurs who want to look good in the future success of the company in this situation should not take this wisdom too much. After all, there are good reasons to keep the liquidity won in the company and instead rely on a very favorable debt financing at the time.
You get financing faster and easier
Quite simply put: If you don’t really need money, it’s easier. In good times with good order situation, solid sales and generally good liquidity situation, companies also get a loan commitment from a financial service provider more easily.
The financing is usually cheaper
Debt capital is always cheaper than equity capital. Due to this leverage effect, companies should always consider whether it makes no sense from an economic point of view to resort to debt capital (at least in part) when investing.
Especially when it comes to the company, this consideration counts twice as much, because banks must offer so-called risk-attested interest rates. This means that the better the company is, the better the interest rate.
Liquidity reserves for “bad times”
If you finance if you have the necessary funds for the investment itself, you can set back your own liquidity reserves and then use them freely if unforeseen situations arise – for example, when economic weakness periods require expenditure and investments. These reserves are particularly valuable if it would become more difficult to obtain a loan in worse times.
Free choice among financial providers
Without the pressure behind the fact that financing absolutely has to be found, it is easier and more prudent to look for suitable providers. A derived provider comparison not only improves transparency in the cash out refinance commercial property a process, but also the conditions themselves. If you look for a loan as a backup under high pressure to succeed and with little equity, not only the selection possibilities usually decrease, but also the conditions in terms of interest rate, maturity, guarantees and the like are worse. In other words, while you can choose the financing partner in good times, you have to take what you get in economically tense times.
The current good situation on the financial market
The current favorable situation in the commercial financing market allows companies that want to take out a loan with a good equity ratio and sufficient guarantees to shape the conditions very positively. If this situation changes, for example, due to an interest rate turnaround by the ECB or a weakening economy, as we already observe in various processes, a company loan also becomes automatically more expensive – interest rates are rising, more guarantees are required to minimize the risk. The reserves of the company “decrease” in value in such a way that more certainties must be applied and more own resources must be brought in in order to obtain financing that may even have worse conditions.
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Conclusion
Those who are doing well today should preserve this situation – and still invest in the future. Financing for companies is currently very favorable due to low key interest rates and the good economic situation. Especially successful companies with liquidity reserves should not use them for long-term, high investments, but should also rely on debt financing as long as the costs are low – and only use the reserves when this situation changes. In this way, companies as a whole and at the same time save on their own ability to act and flexibility.