When your business is in trouble it can be easy to think that borrowing money is the easiest fix you can make, but money comes at a price. Fundamentally, borrowing money means you are taking future profits into today in hopes of being able to get a better result with them compared to waiting for the profits to arrive on their own. Under normal circumstances this would be called leverage but under distress a decision to borrow money can be the detrimental.
Money should only be used to facilitate a result no different than any other resource your business has access to. I don’t believe many entrepreneurs think of money as a resource that needs to be worked and leveraged, but instead think of it as something unique and mysterious. If your business purchased a printer you would expect it to print. If your business hired a salesperson you would expect them to sell. When your business has money, what do you expect from it? It should be used to help your business increase its profitability and ultimately its value. As an entrepreneur, if you can’t explain how your business is using its cash then you may find yourself without it one day.
WeWork has secured a $1.75B line of credit from the Goldman Sachs Group as part of their corporate restructuring. WeWork is a growing business that was looking to go public to raise the capital they needed to fund their growth. Through a series of missteps, WeWork was not able to go public which has left them without enough money to operate. They have been busy selling off assets and divesting themselves of anything not related to their core business but they still haven’t developed a strategy for getting to profitability. Their plan was to raise capital to keep growing with an expectation that at some future point they would in fact be profitable. Because their plans to go public didn’t materialize, WeWork has had to work quickly to ensure they are able to remain operational and part of their short-term strategy including finding a line of credit from which they could float their costs.
When your business is in distress, borrowing money can seem like an obvious answer to your problems. A small or medium sized business rarely ends up in a better position when they borrow money under pressure. It can be a better but tougher decision to make changes to your business while under pressure and deal with short term pain so that your business can get through the difficult moment and emerge better for it.