American Airlines declares bankruptcy because of their overwhelming debt load. How many airlines haven’t declared bankruptcy? Are there any major ones, besides Southwest, that haven’t?
Debt is a useful tool when not overused. It’s just that there’s as much overuse of debt as there is over mentioning of Tiger Woods. Look at the list of large firms, private equity deals and similar that collapse because of the debt burden.
Many small business owners say they are undercapitalized and it limits their growth. Well, it’s better to be undercapitalized and in business than leveraged to the hilt and going out of business. It’s why we recommend to business buyers and sellers that the buyer’s acquisition debt service be as close to a 2:1 ratio (with profit) as possible. That means the baseline is 50% of profit to acquisition debt. This allows the buyer to have cash to make (non-deductible) principal payments, taxes, fund growth and handle emergency cash needs (which can be fast growth). This is much higher than bank coverage ratios and provides cushion.
