Can Business Borrowing Discipline In The Next Credit Cycle Preserve Liberty?

Should the businessperson borrow money solely because the market has become more favorable with lower interest rates and free flowing capital? Or, should borrowing decisions be driven by sound capital planning and strategic yet conservative business reason? When business credit markets move from ebb to flow the need for solid capital planning and borrowing reason becomes critical. By doing so the businessperson promotes well functioning credit markets, lower borrowing costs and the preservation of personal liberty.

Let me paint a picture to illustrate why borrowing discipline is vitally important for financial markets. One of the first things I learned as a helicopter pilot is that take-offs are optional but landings are mandatory. There is nothing like the thrill of pulling pitch, feeling the lightness of the helicopter take form and then accelerate into a sky so blue it hurts to look at it. Soon the reality of the laws of physics demands the attention of the pilot and preparation is made for landing. The same logic applies to borrowing money for your business. The decision to borrow money is usually completely voluntary but repayment of the loan at some point in time and in some form is almost always mandatory. The business leader must have the discipline to make a smart borrowing decision to avoid a repayment crash later.

The business lending cycle moves in fairly obvious patterns. Granted, some peaks are higher than expected and some valleys are deeper than anyone could predict. But there are obvious signs that a new business credit cycle is about to begin or a robust period of lending is about to end. The business borrower should be on the lookout for changes in lending activity that may indicate the loan herd is on the move again. Banks and other lenders tend to move together when their appetite for lending improves or shrinks. Changing economic conditions or government regulation can also spook the herd.

We want financial markets to function well. The alternative is chaos. The business leader is the best person to exercise borrowing discipline to promote healthy and stable capital markets. However, since nature and financial markets abhor a vacuum, banks and politicians will attempt to enforce financial restrictions in the absence of self imposed borrower discipline. The outcome is often an inefficient allocation of capital and increased business borrowing costs. Look closer at the three sources of borrowing discipline and see why lenders and governments are a less desirable alternative to business leaders to instill borrowing discipline.

Lenders are driven by profit motives. They are not in the charity business but are hungry to make new loans to generate interest income and fee revenue. Publicly traded banks are even more focused on the bottom line because the stock markets are cruel taskmasters if results do not meet expectations. The publicly traded lender is only as good as the last quarterly results. When they need to drive earnings per share they either cut costs or make more loans. There is an inherent conflict of interest because a bank gets paid when it makes a new loan. Lenders are concerned about making quality loans but if you are a qualified lending prospect the lender is not the best choice to exercise borrowing discipline for obvious reasons.

Governments are more than willing to step in and enforce borrowing discipline when financial crises hit. Their response is usually more borrowing laws, rules and regulations which often have unintended consequences and increase business borrowing costs. The concentration of power in any government is a net reduction in the freedom of its businesses and citizens.

Business leaders are the best source of borrowing discipline. Financial markets function efficiently when sound business capital planning drives the strategic demand for new loans. Lenders make good loans and enjoy a healthy bank balance sheet with lower loan loss reserves. The borrowing relationship gets stronger because loan payments are made on time, trusts increases and lending risk can be appropriately measured. Politicians have fewer crises to address so the regulatory burden and loan costs for business borrowers goes down. Freedom is preserved. Executive coaching for business capital decisions can help instill a form of financial discipline when the allure of cheap money is irresistible. Get help if you need it. Be a patriot and make sound business capital decisions by exercising your borrowing discipline.