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Using Debt to Replace Equity Capital in Improving Company Finances

  Michael K. Menerey, Partner, CFO Edge, LLC  
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  Article Summary  
In the business world and in everyday life, the mention of debt often carries negative connotations. However, in actuality, debt is one of the best methods of managing your finances and increasing your company’s wealth. It is not, as many people think, a burden that lowers a business’s capacity to function. In many cases, debt can be an extremely useful tool. If the exact reason for incurring debt and the uses for that debt are properly and specifically identified, they can improve the company’s financial structure.

In particular, debt can be used as an inexpensive substitute for equity capital (well below the 15 plus% cost of equity capital). Through such uses, it can not only enhance investor returns, but also solve liquidity fluctuations, while enhancing growth of the business. In fact, debt should be considered as part of every company’s capital structure and, by taking a few simple precautions, it can be implemented cheaply and effectively.

This article looks at how debt can be used to replace equity capital. The discussion includes options for finding an appropriate form of debt, considerations for negotiating new debt, and suggestions for managing debt successfully.

Los Angeles and Southern California CEOs and CFOs looking at debt financing, forecasting and debt management may want to consider working with an outsourced provider of CFO services. An outside professional experienced in securing and managing debt can be helpful in advising on all stages of the process.

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