Using New Money for Old Debt

It happens to every company.  You have debt from a while ago that is still piling up and you are not quite sure on how to pay for it.  All of a sudden, you get some new investors in your company and now you have some extra money.  You think, well I should pay off all of my old debts right away since I now have extra cash.  Though it seems like an obvious thing to do, it may not be the best choice for you and your company.  Here are a few reasons on why you should not use new money to pay for your old debt.

The first reason you may not want to use this new money to pay off the older debts is because the expected return the investor would be demanding may be more than the interest that the debt is accumulating.  If an investor is demanding a 10% return while your interest on the debt is only around 5%, you would rather not have to pay the investors return.  Using that money to pay off the older, 5% debt could cause you to get into a hole and the investor will be expecting his return.

Another reason you may not want to use the new money to pay off that burdensome old debt is because you may need to use that money to invest immediately to try and turn a profit.  If you are to use the money to finance projects first, pay the debt off after the investments shows a return.  This way you are making money currently without spending all your money on a debt.

Debt is a tricky thing.  Sometimes it can be good, sometimes it can be bad.  Regardless of if it is beneficial or not, it is going to need to be paid.  But, don’t waste your recent money on paying off that old debt if it could harm you in the long run.