Thinking about your debt-load

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Sunday, January 1, 2006

Debt can be a good tool for leveraging your business, but there's a level you shouldn't go beyond." That's Bill Polk, director of CapitalSource, saying what should be pretty obvious. Less obvious is what that level is.
For Alan Kruglak, president of integrator Genesis Security and an author of books on security company management, almost any debt-load is too much. He has a $2 million cash reserve. While he understands not every business can find itself in such a plum position, he advises against bringing outside funding whenever possible: "Outside investors will give you nickels on your investment."
So what does he suggest if an integrator needs capital to bid on and take on a big job, or make an acquisition?
For the former, he advises securing a line of credit with a local bank, starting off small, demonstrating a record of payback and building a relationship. When the time comes for a big loan, the small bank will feel comfortable and an outside investor won't be necessary. If that doesn't work, he said, "definitely go to family" before looking elsewhere. Family, he said, will watch every penny.
Or, grow the business with vendor debt--most vendors bill out 30 to 60 days.
Of course, "those who have read my book will get deposits, frontload their jobs," he said.
As for acquisitions, "A lot of guys acquire companies, but find once they acquire an integration company, the owner, who's the driving force, he's not going to give you the energy and drive" that made the company an attractive acquisition in the first place. Factor in the cost of the acquisition, and "I don't think many people have created successful business models with acquisitions."
So how can a business grow? Kruglak emphasizes good old-fashioned customer service, hard work, and intelligent management. He said, for some companies, the way to grow the business is very simple: raise prices.
"Based on my many, many lectures at security companies," he said, "most people undervalue their services."