The Stagnation Trap: Why "Zero Debt" is a Dangerous Strategy

The Cost of Being "Debt-Free"

Family businesses that survived the long financial crisis often have a permanent scar: they equate Debt with Disaster. While understandable, this mindset is now a strategic trap.

In the €15M–€30M turnover zone, relying only on Organic Growth (reinvesting your own profits) creates a mathematical problem you cannot solve.

The Problem: The Speed Gap

A competitor who borrows to automate production today lowers their unit costs immediately. A company saving up cash to invest in three years will be forced to buy that same equipment at a higher price (due to inflation), while having lost three years of efficiency gains.

The Pain of Inaction: Losing the Race

The decision to avoid debt is often presented to the Board as "conservative" and "safe." In reality, it is an active decision to let inflation eat your capital and accept a lower Return on Equity (ROE).

When equipment prices rise faster than your net profit margins, your corporate reserves lose purchasing power every month. Borrowing acts as a hedge: it locks in the cost of the asset at today's prices, allowing you to repay with future, inflated revenue.

Chart Reality: This isn't just a graph of "potential." It is a graph of survival. The gap between the two lines is where you lose your best clients to competitors who have better capacity and lower costs.

Breaking the Mental Barriers

To survive the next phase, the Board must stop acting like a "Custodian" (guarding the vault) and start acting like an "Allocator" (deploying fuel). The fears dominating family meetings are often remnants of outdated practices rather than reflections of modern financial reality.

1. The Liquidity Myth

   Cash is King?

   Asset is King.

   In an inflationary environment, cash is a passive asset that loses value.

   The smart move is to convert that cash (and cheap debt) into productive assets that generate higher returns.

2. The Autonomy Myth

   Equity is 'Free'?

   Incorrect.

   Using your own money is the most expensive way to fund growth, due to its high Opportunity Cost.

   Utilizing cheap debt (where the return you get from investing it -ROIC > Interest Rate) drastically increases the Return on Equity (ROE) for shareholders.

3. The Control Myth

   Banks 'Run the Company'?

   Stagnation is the Enemy.

   Banks are disciplined partners.

   You don't lose control because you borrowed money; you lose control because you didn't have a plan to pay it back.

Capital Architecture: The Right Tool for the Job

Stop using your overdraft (sight account) to pay for long-term investments. It is expensive and dangerous. The modern CFO constructs a Capital Architecture to minimize the Weighted Average Cost of Capital (WACC) and maximize tax efficiency for the company, using specific tools for specific needs.

Factoring: It's Not for "Desperate" Companies

Many family firms refuse to use Factoring because they think it signals distress.

This is a costly mistake.

Factoring isn't just about borrowing money; it is about outsourcing risk.

In a market where bad debts can derail profitability, the ability to transfer risk is a strategic shield.

Protecting the Family: Ring-Fencing

The biggest barrier to borrowing is fear: "I don't want to put the family house at risk."

The solution is Ring-Fencing. Do not borrow through the Holding company that owns the real estate. Place the investment and the debt in a separate corporate vehicle (SPV).

Ring-Fencing Assets: Protecting Family Wealth from Business Risk

The greatest barrier to adopting an aggressive leverage strategy is often internal. A perception gap exists between the Founder (focused on wealth preservation) and the Successor (focused on expansion).

Thus, risk is isolated—satisfying the Founder's need for security—while growth is funded, satisfying the Successor's ambition.

Simultaneously, the relationship with banks must be treated as corporate governance via Covenants.

The Hard Truth

The market is moving toward violent consolidation. Players in the €20 million range face a binary choice: leverage the balance sheet to acquire and scale, or become acquisition targets themselves.

Debt is not a sign of weakness—it is the fuel of scale. Keeping a "clean" balance sheet in a world running on leverage is simply choosing to slowly disappear.