Cash or Credit?


Accountants are trained to have a built-in bias favoring credit, based on the simple logic that the interest is tax deductible. Is that always wise? Part of that comes down to personal bias: Some people find the payment of interest to be abhorrent. But when we put pencil to paper we sometimes discover that credit gives us far more options for pursuing our goals, so let's talk about it.

Consider two fictional law practices, each grossing $400K in revenue a year. That's a respectable one-person practice but if you want to make it grow, do you borrow the funds or do you make it happen organically? It depends largely on your balance sheet.

Suppose one of these firms has a $75K cash stash in a bank account while the other firm owes $200K to contract attorneys and has nothing but current cash flow to pay them out of. Although the firm sizes are the same, their strategies should be very different.

The one with the cash stash is perfectly positioned to grow organically. Closer examination reveals that the cash was accumulated in a single year because the attorney paid himself poorly. He wants to grow and he's willing to sacrifice in the short term to make it happen. The only reason he could possibly justify going into debt would be if he had an incredible opportunity - perhaps buy-in into a sure-thing mass torts practice - that would require a large cash outlay. In that situation if the expected payoff justifies the expense and the risk inherent to all indebtedness, credit would be justified. Otherwise, no.

Keep in mind I am not talking about credit card debt when I say credit. I am talking about financing from a traditional banking source or from a lender who specializes in law firm financing. If you are talking about credit cards the answer is always no except in the most dire of circumstances.

Now the attorney with the $200K debt, that's a different story. The attorneys may well agree to settle for less if they can get an instant lump-sum payout - say 50%. Saving $100K in debts would easily justify the new indebtedness because it would be a net gain of $100K, minus deductible financing expenses.

These are two simple examples, but they illustrate the range of possibilities. I deal with these choices for my clients every day. When faced with such choices do you make a decision and move forward, or do you let it

founder? If you're ready to move forward, I can help.


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