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> Obviously, a private company with hundreds of millions in stable recurring revenue shouldn't operate debt-free -- debt can be a useful tool, even if only as a

> Obviously, a private company with hundreds of millions in stable recurring revenue shouldn't operate debt-free -- debt can be a useful tool, even if only as a rainy-day tool for situations such as the recent pandemic. Why obviously? Seems to me when a crisis hits the last thing you want to have is debt you need to pay back. For example, should Apple, with their huge mountain of cash, have debt? Do they need debt? I guess one can also ask the same about countries. Do they really have to maintain some level of debt in order to have a healthy economy? Why not just have a big bunch of cash put aside for a rainy day? How is this "obvious"?

pixelmonkey 6y ago
I think we are conflating "available credit" and "utilized credit". (Or, rather, I didn't clarify that myself.) Available credit is something like, "Company X has $100M in annual revenue and a $5M line of credit, which is not presently utilized." Arguably, such a company is better positioned than the same company X without the $5M credit facility. The cost of the annual fee to maintain the credit facility will be miniscule compared to the security provided by having $5M instantly available in a rainy day scenario. This is the way by which I mean some corporate debt (specifically: available revolving credit) is "obviously" a good idea. You're right that term loans involve more trade-offs: interest, maturity, etc. But those are still trade-offs, not always downsides. Assuming even a modest annual-interest-rate-beating growth rate in the business with a high probability that such growth materializes, the debt can make the business easier to manage and actually increase the probability of sustainable growth. That's the other way in which I believe that debt can be an obvious benefit. But obviously if you take too large a term loan, it can be disastrous, thus my question about debt ratios. For example, for company X above, it's obvious to me that a $100M term loan would probably be dangerous. But, a $10M term loan vs $5M? Not sure. That's why I am curious about ratios.
pixelmonkey 6y ago
Also, re: your question about Apple: > For example, should Apple, with their huge mountain of cash, have debt? Do they need debt? Obviously not. Debt is for companies that have already utilized most of their cash, right? Or have future cash flows that they want to access now before the cash actually materializes. Apple, by contrast, should probably become an investor or lender, since it doesn't know what else to do with its excess cash. It certainly serves no purpose being hoarded on their balance sheet.
- zxcmx 6y ago
  You can create debt in jurisdiction A collateralised with assets (even cash!) in jurisdiction B... potentially without any tax implications. I expect Apple can borrow money basically for free, so there's probably a bunch of financial-engineering type reasons that debt would be useful to them.
eadmund 6y ago
> Seems to me when a crisis hits the last thing you want to have is debt you need to pay back. I think that when a crisis hits the first thing you want is cash, and that means the last thing you want is to have just spent all your cash paying off debt. Imagine that you need to buy $100,000 of inventory to sell, and you have $100,000 to spend. If you spend all your cash on inventory, then you have zero dollars on hand. When your account comes back and tells you that you need to pay another $10,000 in taxes — now you need to borrow, and it's a lot more difficult to borrow with nothing in the bank than with $100,000. When one of your customers trips and falls on the just-washed bathroom floor, you need money to compensate him. Not having cash is pretty awful: necessary cash outflows can be spiky, and income can be spiky, but the spikes do not necessarily need to align. This can lead to a cash flow crisis, and eventually to a restructuring bankruptcy. OTOH, if you had borrowed the money to buy that inventory, then yes you would have had to pay $110,000 or $105,000 or whatever, but you would also have had the freedom that cash gives you. Borrowing would have smoothed out a major expense, and permitted you to pay it off in smaller chunks, making a cash flow crisis less likely (although of course still possible). Consider right now, with the whole COVID-19 situation. It could very well make sense to borrow at a good interest rate: the difference between the interest rate on debt and one's investment return rate is essentially the cost of insurance to have cash on hand. Note that sometimes this can even be negative: it is possible even now to get 0% interest-rate credit cards with terms of over a year: you can invest the cash and pay it off in twelve months.

pixelmonkey 6y ago

I think we are conflating "available credit" and "utilized credit". (Or, rather, I didn't clarify that myself.) Available credit is something like, "Company X has $100M in annual revenue and a $5M line of credit, which is not presently utilized." Arguably, such a company is better positioned than the same company X without the $5M credit facility. The cost of the annual fee to maintain the credit facility will be miniscule compared to the security provided by having $5M instantly available in a rainy day scenario. This is the way by which I mean some corporate debt (specifically: available revolving credit) is "obviously" a good idea. You're right that term loans involve more trade-offs: interest, maturity, etc. But those are still trade-offs, not always downsides. Assuming even a modest annual-interest-rate-beating growth rate in the business with a high probability that such growth materializes, the debt can make the business easier to manage and actually increase the probability of sustainable growth. That's the other way in which I believe that debt can be an obvious benefit. But obviously if you take too large a term loan, it can be disastrous, thus my question about debt ratios. For example, for company X above, it's obvious to me that a $100M term loan would probably be dangerous. But, a $10M term loan vs $5M? Not sure. That's why I am curious about ratios.

pixelmonkey 6y ago

Also, re: your question about Apple: > For example, should Apple, with their huge mountain of cash, have debt? Do they need debt? Obviously not. Debt is for companies that have already utilized most of their cash, right? Or have future cash flows that they want to access now before the cash actually materializes. Apple, by contrast, should probably become an investor or lender, since it doesn't know what else to do with its excess cash. It certainly serves no purpose being hoarded on their balance sheet.

zxcmx 6y ago
You can create debt in jurisdiction A collateralised with assets (even cash!) in jurisdiction B... potentially without any tax implications. I expect Apple can borrow money basically for free, so there's probably a bunch of financial-engineering type reasons that debt would be useful to them.

eadmund 6y ago

> Seems to me when a crisis hits the last thing you want to have is debt you need to pay back. I think that when a crisis hits the first thing you want is cash, and that means the last thing you want is to have just spent all your cash paying off debt. Imagine that you need to buy $100,000 of inventory to sell, and you have $100,000 to spend. If you spend all your cash on inventory, then you have zero dollars on hand. When your account comes back and tells you that you need to pay another $10,000 in taxes — now you need to borrow, and it's a lot more difficult to borrow with nothing in the bank than with $100,000. When one of your customers trips and falls on the just-washed bathroom floor, you need money to compensate him. Not having cash is pretty awful: necessary cash outflows can be spiky, and income can be spiky, but the spikes do not necessarily need to align. This can lead to a cash flow crisis, and eventually to a restructuring bankruptcy. OTOH, if you had borrowed the money to buy that inventory, then yes you would have had to pay $110,000 or $105,000 or whatever, but you would also have had the freedom that cash gives you. Borrowing would have smoothed out a major expense, and permitted you to pay it off in smaller chunks, making a cash flow crisis less likely (although of course still possible). Consider right now, with the whole COVID-19 situation. It could very well make sense to borrow at a good interest rate: the difference between the interest rate on debt and one's investment return rate is essentially the cost of insurance to have cash on hand. Note that sometimes this can even be negative: it is possible even now to get 0% interest-rate credit cards with terms of over a year: you can invest the cash and pay it off in twelve months.