As so many countries, businesses and consumers are in debt these days, it is essential we know how this debt will affect both themselves and ourselves. As a business owner or manager, it is important to ascertain where we, and our stakeholders are within their own debt cycle.
This factor cannot be overemphasised because if we, or the businesses we work with are too heavily in debt and unable to pay their way, many negative ramifications will occur for all of us. On the other hand, it is in difficult times that those businesses and people with cash and access to credit, are able to make the most money.
Five main factors regarding debt are:
- that it and the interest due have to be paid,
- in the granting of debt, your financers often control the destiny and behaviour of your business,
- debt is addictive,
- many businesses and people cannot manage their debt properly, and
- too much debt that cannot be paid, leads to many negative and life changing outcomes.
I recently reviewed videos by Ray Delio and the article mentioned below which prompted this blog in light of the RBA’s recent decision to reduce interest rates here in Australia.
The problem in the past is that in order to create more business and encourage innovation during and post COVID, the RBA kept the interest rates for too low and for too long. This resulted in many people thinking debt was almost free of cost and rates would not rise again. As a number of commentators have said since, the low rates were too cheap and therefore corrupted many borrowers into believing there was almost no risk when taking on debt.
Effectively, the RBA projected that debt was good and savings were bad, whether they meant that or not. It would appear that this thought is still apparent today. It would also appear that the RBA does not always consider real-world experiences in their deliberations. These factors have been presented in other forums previously.
In the meantime, let us review the five factors mentioned above.
Debt has to be repaid, plus the interest owing. You would think that this reality was obvious and just commonsense. However, there are a surprising number of borrowers who don’t accept this reality, plus a whole industry of do gooders, politicians, bureaucrats and lawyers which suggest otherwise.
In the granting of debt, your financers often control the destiny and behaviour of your business. Again, this is obvious because you do not get finance without telling lenders about your affairs. When you cannot pay your debt therefore, they will dictate what you can or cannot do, which can lead to many costly and negative outcomes.
Debt is addictive. History shows us that many borrowers rarely stop at one debt. It also seems they cannot appreciate that by paying off the first debt, they have just received a get-of-jail card.
Having cleared one debt without problems, these borrowers think this will always be the case. Unfortunately, if circumstances change for the worse, and they often do, borrowers may respond by obtaining yet another larger and more expensive debt to resolve the problems of the first debt.
Many businesses and people cannot manage their debt properly. We see this scenario time and time again when businesses and consumers have no backup finances or resources to cover any shortfall to clear outstanding past due payments. Recent events reveal that even the most experienced businesspeople are not immune from mismanaging debt.
Even when the debt is good debt, many borrowers do not seem to understand that when they are unable to pay their debts as previously agreed upon, there are a number of proactive actions they can take to mitigate any negative outcomes.
Too often however, borrowers refuse to see reality and hope without any resources to solve the problem, that if they can just hang on, they will survive this bad situation. They rarely do.
Too much debt that cannot be paid, leads to many life changing and negative outcomes. We have seen too many examples since the commencement and post COVID, of these outcomes. When debt cannot be repaid, this has often led to a borrower ending up in insolvency or bankruptcy, or worse. Unfortunately, many borrowers still do not seem to learn these lessons.
In discussing the above factors, the theme has been to present the different factors which may affect borrowers negatively. The reality is that when borrowers are in trouble, they are usually in a death debt spiral which they cannot escape. As a result, they will either be forced by their creditors or their insolvency administrators to sell any assets they own, and will have to bear the label of a failed borrower.
However, even in a negative debt cycle, history also shows us that a great deal of money can be made. It is in these situations, that those with cash or a positive line of credit are able to take advantage of the naïve, those that were addicted to debt and/or poor debt managers.
This is where business and consumers can, if they have the resources, find the stories relating to negative debt experiences so valuable. It is sad that some borrowers may lose, but that is one of the aspects of life which too many people ignore. The strong always seem to do well, and in this case, it those with the cash and other resources that do so well.
In conclusion, taking on debt is always a risk, and if taken, needs to be managed properly to avoid being left with a poor borrowing history and few assets to survive into the future.
Further information
Two sources of information which formed the background to this blog amongst many others are shown below.
Review Ray Delio talking about government debt cycles and death debt spirals which are in four short videos. The same principles relating to debt cycles and death debt spirals that Ray talks about, also applies to businesses and consumers.
“Debt can be both good and bad but it all comes down to management” by Allison Schrager, The Age 28/12/2024.
Want to know more, contact Kim at kim@creditmatters.com.au, or 0411 649 261, or have a look at what we offer via our website at www.creditmatters.com.au
