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8 Tips to Help Highly Leveraged Businesses | SVA CPA

Written by Nicole Gralapp, CPA, CExP™ | Mar 25, 2024

In the face of rising interest rates and their impact on highly leveraged businesses, it's important to adopt strategic financial planning and management. Highly leveraged businesses, which require significant assets for operations, are particularly vulnerable to the effects of increasing interest rates.

These businesses face heightened pressure on their cash flow due to higher debt service payments, necessitating adept financial management to ensure sustainability.

8 Key Strategies for Managing High Leverage Businesses

1. Enhanced Cash Flow Management

With rising interest rates, prioritizing efficient cash flow management to meet increased debt service requirements is a must. This is especially important for businesses that were previously managing to get by, but may now be struggling to meet their financial obligations.

2. Proactive Cash Flow Planning

Cash flow planning can help businesses assess their ability to limit cash distributions, and instead focus on accelerating principal repayments. This approach is particularly relevant for businesses with fluctuating revenue streams, such as those in the hospitality sector.

Consider ways you can increase sales and cut expenses. If you plan to pay down debt, make sure to investigate if there is an early pay penalty or penalty for refinancing.

3. Evaluating Capital Expenditures

Assess the necessity of capital improvements and expansions, especially under current market conditions characterized by high construction costs and interest rates. Delaying non-essential projects could preserve cash for more critical financial obligations.

However, keep in mind that if you defer maintenance, you may lose property value. Serious thought needs to be given to what, if any, improvements and maintenance projects can be delayed, and what can’t wait.

4. Exploring Alternative Financing Options

Diversifying financing sources can offer relief from high interest rates. Alternative financing through private equity, wealth management companies, or internal funding from ownership groups may provide more favorable terms and conditions.

5. Restructuring and Refinancing Debt

It may be possible to restructure or refinance existing debt to secure lower interest rates or more manageable repayment terms. This may involve negotiating with lenders to extend amortization periods, thereby reducing the monthly principal payments and easing cash flow pressures.

6. Operational and Budgetary Adjustments

Rigorous budgeting and operational adjustments are necessary to mitigate the impact of doubled interest expenses. This includes scrutinizing profit centers, deferring non-critical expenses, and potentially restructuring the business to eliminate underperforming segments.

7. Revisiting Pricing Strategies

In an environment where costs are escalating, revisiting and possibly adjusting pricing strategies to reflect the true value of the products or services offered can help improve margins and financial stability. Is your pricing competitive in the marketplace?

8. Communication and Planning with Stakeholders

Open communication with investors and stakeholders is crucial, especially when making significant changes to distributions, operations, or business strategies. Stakeholder buy-in is needed to execute long-term adjustments to navigate financial challenges.

For highly leveraged businesses grappling with rising interest rates, adopting a multifaceted approach that encompasses cash flow management, strategic planning, operational adjustments, and exploring alternative financing options is key.

Taking proactive measures will allow businesses to navigate through these challenges, ensuring sustainability and growth even in tough economic times.

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