But other expenditures, such as the next tweak on a piece of software or the latest model of office or factory machinery, can be delayed without hurting the business. Bay Cast funds its capital spending out of profits, says Holman. It takes you longer to do what you want to do, but it makes you stronger. When a downturn arrives, it's also important not to be caught owing a lot of money, say many small business advisers and longtime entrepreneurs. Bolster equity capital, pay down debt, secure lines of credit, and convert any remaining borrowings into fixed-rate loans to make financial planning easier.
Financial leverage can be toxic.
What's more, bankers tend to be exuberant lenders during expansions. A recent study of more than two million commercial and industrial loans granted by 580 banks between 1977 and 1993, undertaken by Patrick K. Asea, economist at the University of California, Los Angeles, and S. Brock Blomberg, economist at Wellesley College, suggests that banks extend way too many loans when times are good. That optimism gets overextended borrowers into trouble during recessions. Over the past three years alone, bank commercial and industrial loans outstanding have been growing at double-digit rates. In addition, the quality of those loans in a recession may be worrisome, too.