My client asked me if they should take out a loan to expand their business. After reviewing the terms of the loan, which had aggressive repayment terms, I realized this loan would almost immediately create a cash crunch, threatening the viability of their business.
If you are a founder, CEO, or business owner who has experienced losses and taken out a loan to cover those losses, you might be under the impression that your company is doing well and has enough cash to continue with business as usual.
But is this really the case?
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Let’s start with a hidden issue that very few founders and CEOs take seriously -- Negative Equity.
If you are a tech company or a business designed to prosper at scale, negative equity may be normal or even expected. But for most business owners, negative equity is a huge problem.
It means your business losses exceed your equity investments.
For instance, if you've invested $100K, but the business has lost $150K over its lifetime - you have $50K in negative equity.
Taking on debt can obscure negative equity temporarily.
But debt just hides the problem—unless used to turn the business around, debt will catch up to you.
If you’re in this position, you most likely are going to have a HARD TIME selling your company and raising capital.
In most cases, negative equity serves as a significant RED FLAG:
* It shows that the business’s losses have eroded the equity investment.
* It deters investors and buyers who are looking for businesses that have proven to be viable investments.
* It limits financing options, as lenders typically want to see positive equity.
* It could indicate the company incurred debt to cover losses.
To FIX negative equity you must either raise more equity or the business must start making money.
Here’s what I advise clients to do to fix negative equity:
1) Get back to making a profit ASAP, grow revenue that is accretive to the bottom line, and cut costs to reduce losses.
2) Restructure existing debt to relieve short-term cash flow pressure.
3) Seek additional equity investments.
Addressing negative equity EARLY is key.
In my client's case, they didn’t even consider negative equity as a business issue that would keep them from growing in the short term.
By looking at the business strategically, and coming up with a plan to address negative equity, we were able to course correct.
That was a fantastic beginning for them in 2024.
As a CFO, I help small businesses recognize potential roadblocks and take action before it’s too late.
What about your business?
If your business has recently experienced losses and/or has taken out a loan and you’re unsure if the loan was invested effectively, DM me.
A quick financial review can set you on the fast track to success in no time.
#cfo #finance #accounting #debt #equity
