Paying off business debt

[Louis Balfour]

We have some properties in a partnership, and some debt secured on them. Fairly modest LTV, but some of them are tenanted so we are hit with the restricted interest relief situation. We have a fair sum of cash in the bank, which is earning nothing.

The intention had been to invest elsewhere, but I don't see anything that I think we should invest in - at the moment. So I am considering paying down some debt.

The upside to this is, of course, that we are deploying cash that is earning nothing, to reduce debt that is increasingly costing plenty.

The downside is that we are putting cash into illiquid assets and if we want to finance it back out later it may not be easy to do.

It is comforting to have a decent cash buffer. We will still have quite enough to keep us going if the economy tanks, but holding cash is, well, reassuring!

What do you think chaps?

[Al Gorithum]

General rule of thumb is to pay off debt as quickly as possible.

[Louis Balfour]

Al Gorithum said:

General rule of thumb is to pay off debt as quickly as possible.

Historically, we have not done that but instead used capital to invest. But I wouldn't take a lot of persuading to start paying down debt quite quickly. As I said in my OP, I cannot see anything I want to invest in, so it perhaps makes sense to pay down some debt.

[Al Gorithum]

Louis Balfour said:

Al Gorithum said:

General rule of thumb is to pay off debt as quickly as possible.

Historically, we have not done that but instead used capital to invest. But I wouldn't take a lot of persuading to start paying down debt quite quickly. As I said in my OP, I cannot see anything I want to invest in, so it perhaps makes sense to pay down some debt.

As the cost of debt rises and ROI decreases it makes sense to pay it off asap IMO.

[Redarress]

Al Gorithum said:

As the cost of debt rises and ROI decreases it makes sense to pay it off asap IMO.

Agree with the above 100%

[classicaholic]

If the recession does happen as hard as some are predicting there will be bargains to be had in all sectors for people with cash, I would hang on and look for some forced sale bargains.

[Louis Balfour]

classicaholic said:

If the recession does happen as hard as some are predicting there will be bargains to be had in all sectors for people with cash, I would hang on and look for some forced sale bargains.

That is how we have always thought. As a consequence, we have been holding too much cash for a long time.

We can always secure borrowing later against unecumbered assets.

[skwdenyer]

Louis Balfour said:

classicaholic said:

If the recession does happen as hard as some are predicting there will be bargains to be had in all sectors for people with cash, I would hang on and look for some forced sale bargains.

That is how we have always thought. As a consequence, we have been holding too much cash for a long time.

We can always secure borrowing later against unecumbered assets.

But surely, in a major downturn, those assets may not be worth what they are now, and LTVs may also drop? Obv don’t know the numbers involved, but if the cash is a significant amount are there not other places you could put it as a partial hedge against interest charges?

[Louis Balfour]

skwdenyer said:

Louis Balfour said:

classicaholic said:

If the recession does happen as hard as some are predicting there will be bargains to be had in all sectors for people with cash, I would hang on and look for some forced sale bargains.

That is how we have always thought. As a consequence, we have been holding too much cash for a long time.

We can always secure borrowing later against unecumbered assets.

But surely, in a major downturn, those assets may not be worth what they are now, and LTVs may also drop? Obv don’t know the numbers involved, but if the cash is a significant amount are there not other places you could put it as a partial hedge against interest charges?

Yes, we would not be able to secure borrowing at the same level if prices drop. We aren't highly geared, though.

[Chipper]

We decided to pay off two commercial loans this year. Similar situation to yourself with money sat in the bank devaluing and so took the plunge and cleared both commercial loans. We are a small family business so the circumstances may be different but if you have the funds available in my eyes you will be saving from two aspects with inflation hitting the business account and the increased interest rates on the loans.

[Panamax]

Louis Balfour said:

Yes, we would not be able to secure borrowing at the same level if prices drop. We aren't highly geared, though.

In these dilemmas there's always the "easy answer" which results in some action as opposed to no action. Namely, forget trying to work out what to do and just do half of each. i.e. Use half of your cash pile to pay down debt, then sit back for a few months and see if the picture gets clearer.

[Louis Balfour]

Panamax said:

Louis Balfour said:

Yes, we would not be able to secure borrowing at the same level if prices drop. We aren't highly geared, though.

In these dilemmas there's always the "easy answer" which results in some action as opposed to no action. Namely, forget trying to work out what to do and just do half of each. i.e. Use half of your cash pile to pay down debt, then sit back for a few months and see if the picture gets clearer.

You’re probably right. I just don’t intuitively do things by halves. Which is an error on my part, of that I am aware.

[Panamax]

I quite understand because it looks like a feeble "neither one thing nor another".

I prefer to think of it more positively as "six of one and half a dozen of the other" of perhaps even "best of both worlds"!

It's all in the psychology.