I received a letter a while back from a not-for-profit that notified me that they were looking at borrowing against, or leveraging, the fundamental set of assets that allowed them to exist.  In other words, if they lost those assets because they could not make the payments, they would simply no longer be around.  They were doing so because of significant operating cash flow shortfalls that were systematic in nature.  In fact, they had invested in capital assets that they hoped would increase operating cash flows, and had since seen a dramatic downturn in their fortunes.

No matter what the plan given for rectifying this situation, donors are likely throwing their money down a rat hole.  From a business perspective, this not-for-profit is leveraging the assets they cannot afford to lose under any circumstances, a sign of desperation.  Of course, this happens frequently in business, because the large majority of business start-ups are bankrupt within a few years.  Sometimes it can actually save the business.  But there is the smell of death to it, and the vultures are usually circling within a short period of time.  This not-for-profit probably has few other assets to borrow against, so their behavior is understandable.  But when you have a choice, be careful what assets you leverage.

Though I largely try to avoid debt, there are some assets that it makes sense to leverage.  For example, as loyal Sienna owners, Toyota is willing to sell us a new Camry at 0% interest.  Since our cars have a combined 6,000,000 miles (approximately) on them, this is an attractive offer, especially if you are not bothered by the prospects of sudden acceleration.  Of course, this affects the price of the car, but assuming I can negotiate the price I want, it makes sense to leverage this asset.  If I can’t pay it back, they will come and take the car.  On the other hand, as my readers can readily attest, it would be financial suicide to take out a second mortgage on my house to syndicate this column.

The most important asset any of us have is reputation.  A reputation for truth-telling or dependability enables us to enjoy opportunities that would otherwise be unavailable to us.  There are times I leverage my reputation in order to recommend a student to an employer.  In most cases that is a low-risk decision, but there are a few students that require me to put some conditions in the recommendation so that I protect my reputation.  It is an asset I cannot afford to lose.

We read almost every day about people who have leveraged their reputation for short-term returns—in money, in romance, in success, or in fame.  They leverage their most precious asset, the asset that is their reason for existence, in order to acquire other assets that are not central to who they are, and that are likely to be fleeting.  And when they wake up on the due date for the debt, they have lost forever what allowed them to be who they are.

They are much like that not-for-profit who sent me the letter.  I wish only the best for that organization, and I am hopeful that they will be able to retain those core assets that define them.  But I have heard this song before, and they will not be getting a check from me.