Scraping the Ceiling:

Alliance Cost Containment Discusses Reducing Debt Ceilings in the Private Sector.

The national deficit has been a hot button topic for months, and since increasing the United States’ debt ceiling, global economies worldwide have been on a rollercoaster, leaving many people’s 401Ks in the balance. While our country’s debt is sure to be a mainstay in the media through next year’s presidential election, it has brought to light another important topic that isn't getting much coverage: the decreasing debt ceilings held by businesses in the private sector.

According to Miles Lee, president of Alliance Cost Containment, a leading cost reduction and financial analysis firm headquartered in Louisville, KY, "Bankers reduce the amount of capital available in direct relationship to risk. For a business, in order to increase their access to money, their top priorities should be expense reduction and shrinking their operating budget. This would open up cash flow to reinvest in the growth of the business.”

"The recent recession, coupled with the current national debt debate, has brought more visibility to the importance of business owners being cognizant of where and how they’re spending their money.” While debt in business is virtually impossible to avoid, understanding when, where and why to incur debt can be critical to the long-term viability of any company, small or large.

Miles Lee explains that there are some import factors to take into account when a company is addressing their debt ceiling, including:

• Why Debt?: "Since the recession, many banks have made it much more difficult for businesses to receive funding,” said Lee. For those looking for capital, it’s important to understand the motive, whether that’s expanding your current business or buying a new company. "It’s also key that the decision maker understands what ways they’re looking to grow their business and what their action plan is for recouping the debt incurred from expansion.”   

• Red vs. Black Debt: As mentioned above, there are several reasons for incurring debt, none of which should be for operational expenses, aka red debt. "Many business owners can find additional capital by looking at their current operational expenses and determining where they can reduce these overhead costs,” said Lee. "In some instances better negotiated rates with vendors can produce savings that can be reinvested in one’s business.” Another avenue to reduce red debt and clear up cash flow is to look for redundancies and inefficiencies in your human capital and determining the best way to consolidate jobs. "By doing this, many business owners may be able to find adequate funding that can be allocated to growing their current or new business. If additional funding is needed for these types of expansions – improving customer service, investing in new technology, etc (aka black debt). – then there are many avenues to help support these types of good debt.”   

• Funding Sources: Once the above information has been ironed out, and assuming that one is unable to reduce operational expenses further, it may be necessary to look for alternate options for raising capital. For businesses unable to provide collateral there are several options including tax incentives from the government that can help offset against borrowing risks and bringing in outside investors. If the latter route is chosen, business owners should be prepared to give up a minority share in their business and be mindful that they’re not handing over the majority as a result of engaging private equity. In the event that capital is still required from banks, and you’re able to secure such loans, be prepared to carry part of the costs. "Based on your risk level, you should expect to carry 10-30 percent if you’re low risk, 40-60 percent for medium and upwards of 90 percent for high risk.” The key here is, look at operational expenses first to determine if there are other areas where money is hiding as to not incur any volatile debt.

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