Debt can Kill
I was talking to a friend recently and the discussion moved to entrepreneurs who had lost control of what seemed to be very successful businesses (or so it seemed from the outside). Jet Airways. Zee. Café Coffee Day. Future Group. And many others. If there was one common factor, it was that they all loaded on debt during the good times, over-extended themselves, and when the tide turned, they had no way to pay back the debt. Leverage can be a business killer.
This is not to say that all debt is bad. A business may need debt to augment working capital or fast-track expansion plans. The key is to ensure that the debt can be paid back even in the worst case scenario should things change. Under no circumstance should debt may be taken for unrelated expansion.
Many founders of companies in the public markets pledged their shares to borrow money to fund expansion. For various reasons, some have found themselves unable to pay back the borrowed funds. As a result, they ended up losing control of the companies they created and built over the better part of their lives.
I have never taken on debt in my entire business career. It was a principle my father had drilled into me when I began business – no loans, no debt, no leverage. Live within your means. From the early days of IndiaWorld through to my 23+ years at Netcore, I have always tried to ensure that we are profitable and have positive cashflows to ensure all payment obligations are met on time.
While some businesses need capital to begin and may need to take on debt, the objective must be to have the means to pay it back. All debt is not bad if one can ensure the future income streams will support the repayment – with a margin of safety.
Life has its uncertainties. Early in 2020, few of us would have expected the pandemic. No business would have thought that its revenues would go to zero for an extended period of time – as has happened with many companies. During these times, debt obligations become impossible to meet. It is thus all the more reason to exercise caution when taking on debt – do it if you have a margin of safety, else the debt could become a death trap.
Tomorrow: Part 45