The three ways accountants can get in trouble with debt financing their practice are:
- Using short term debt to make long term investments. Doing this creates problems as the short-term debt will need to be refinanced well before the long-term investment returns are available. If the short-term debt cannot be refinanced, the lender will either sell or close the business.
- Failing to consider that when increasing debt it increases business risk. Borrowers need to ensure their cash flows have a margin of safety to allow for rising interest rates, slower revenue than expected or unexpected costs.
- Excessive borrowing on the practice cash-flow and assets to fund personal expenses, lifestyle costs, motor vehicles, and personal investments.
If practice principals use debt financing wisely it enables a practice to invest and expand faster than it would be able to if just using its own financial resources. If used inappropriately it often ends in the business closing and the owner in financial trouble.