Many gurus say that debt is a useful tool for growing businesses. But the actual number of firms that benefit from a lot of debt is quite small. In order to pay it off, they have to be fast-growing and be able to make outsized returns.
For example, many Silicon Valley unicorn startups take on a lot of debt because their aim is to dominate a particular market. But, of course, those companies are quite rare. There are usually only a handful with potential every decade, and many of them fail.
The other example of the need to take on a lot of debt historically was the big energy companies and manufacturers. They had to borrow to build out their plant and equipment, but they are generally mature now, so the need for borrowing is much lower.
With this background, it is well worth looking into how debt can affect a lot of modern businesses and bring them down. Here’s what you need to know:
Strains Cash Flow
As Alex Kleyner, CEO of National Debt Relief, points out, a lot of debt is just a strain on cashflow. Money flowing to lenders is essentially cash that the business can’t use without defaulting, putting a limit on growth.
Furthermore, the need to pay debt also puts a strain on the other elements of the business that are critical, like marketing and sales. Suppliers and even workers may struggle to get paid if the situation is bad enough.
Fewer Growth Opportunities
At the same time there are fewer growth opportunities when debt is involved. It isn’t as easy to expand and hire new staff when the balance sheet is so poor, even if there are real economic reasons to make the move. In these situations, it may be better to bootstrap using the company’s own funds to pay down debt and make the next move.
Higher Interest Costs
At the same time, debt can lead to escalating interest payments to banks and lenders over time. These payments don’t usually get smaller, and they can really balloon over a short span of a few weeks.
The main problem is usually debt held on credit cards. Business owners will often use their credit cards to plug gaps in their company finances, taking on personal debt for business equipment.
When this happens, it is often just a matter of time before the company goes under. Staff lose trust and people begin to leave, sensing that the entire thing may be about to come crashing down.
Loss Of Control
Finally, going into a lot of debt can increase the risk of losing control of a company. Lenders will sometimes take it upon themselves to start seizing and selling assets if they aren’t getting paid, leaving the business as a whole powerless to do anything about it.
This final issue is significant for business owners because most want to retain control of their companies. They don’t want to feel like their ownership is under threat after years of hard work.
