Business Debt
business debt is a good source of funds for such business activities such as expansion, acquisition of assets or machinery, enhancing the cash flow situation and even acquisition of other businesses. However, if this debt is not managed well, it might get to dangerously high levels becoming a burden to the organisation. This is why all companies should avoid over relying on business debt for day to day operations.
More information on business debt
Affects service delivery
A company that relies on debt usually has very low cash flow levels. This limits the turnaround time for different products and services and therefore service delivery for clients. It delays acquisition of raw materials, outsourced services and transportation of products to clients. A business with cash flow problems may also have problems paying staff members which can demotivate the employees affecting the service delivery and customer service. If this goes on for a long while, it may affect the relationship with the clients and other stakeholders.
High cost of debt
When you approach a lender for debt, there are three classes of costs that may arise. The first is the cost of processing the debt which may be charged as a percentage of the debt requested for. The second category includes the interest rate charged for the debt which may differ from one lender to another. The interest rate is also charged as a monthly or annual percentage and depends on the prevailing market conditions among other factors. The third category of costs are fines and penalties that may arise from delayed or defaulted payments. Cumulatively, the three categories can be very high, increasing the operating costs of the businesses drastically.
Can lead to loss of assets
Most businesses use their assets to secure the debt. These assets may include property, land, movable assets like vehicles and machinery. In case of default, the lender may take over the assets of the business, auction or sell them to recover the money owed. As a business, it is hard to recover from the loss of essential assets and subsequently the loss of assets may result in the collapse of the business.
Overdependence on debt
When a business borrows severally, it is possible to become over dependent on the debt as a means of survival. Such businesses will take up new debt to offset old debt creating a vicious cycle that is hard to break. When such a business exhausts all possible avenues of borrowing, it will collapse.
Investor confidence
Investors like investing in businesses that have a healthy balance between its debts, cash flow and credit. A business with over indebtedness is unlikely to attract a lot of investors and in the case they do, the investors may have very strict rules to adhere to. This means that such a business may not be able to explore new fields or new lines of business without solving their debt issues first. Existing investors may also sell their stake in the business in the fear that the business may collapse in future.
Unhealthy business debt can lead to loss of business opportunities, loss of clients, loss of employees and therefore business failure. All businesses should therefore monitor their borrowing efforts to ensure that the debt is within manageable levels.