Cheap money is just like cheap food. It entices some people to over-eat.
Money has never been so cheap. Some countries are making an effort to re-inflate their economies by issuing zero percent loans to the banks, hoping they will provide almost zero percent money to businesses as well as consumers. Logically, this cannot last long, so it is making a plethora of companies fall hard. Your firm should not fall under this list of companies.
The Tragedy
Some companies are capitalizing on this type of money by purchasing every competitor they can put their hands on. This results in high revenues (for a short time) while bumping up the share price (for a short time). But in the long run, it usually turns out to be an absolute disaster.
There are various industries, where “consolidation” spurts and such tragedies occur. In one era, well-known companies had this urge to boost top-line revenues to billion dollars and continued to achieve this by acquiring a company with a similar trade that had even marginally compatible product lines.
But there is an art behind mergers and acquisitions that is called being able to integrate the acquired company, which of course didn’t go well. Soon enough, the house of cards they had built, began to crumble piece by piece.
The key issue that arises with this approach, aside from its natural instability, is when the debt comes into the picture and the firms use it to make the purchase. The cost of money changes and when it is near zero, it has only one direction to go. A company that is built on the foundation of debt often runs into the trouble of needing more debt at the later stage only to compensate for its own faults.
Debt overload and new, larger, costlier debt can help tip the scales. Sufficient debt and no bank will lend to you.
Debt always bites, and it may wait until you are tired enough to become an easy prey.
Always remember that debt is a drag.
Debt acts as a drag on a company. Small amounts of debt tend to create manageable drag, whereas, big debt amounts can result in total annihilation of the company.
Sometimes, debt is inevitable or even desirable. Large debt is never desirable, but always avoidable.
Controlling the Termite
If the debt is used in a wise manner, then it can give you a leg up. Major expenses that contribute towards the improvement of your products, optimization of your operations, reduction of your overhead, may be worth enduring minor indebtedness. Opting for debt just to secure “cheap” money, surely invites risk. Always aim at creating great products, making customers happy, managing expenses carefully, and keeping the business cash flow positive. This is the basis of a great company, including yours as well.
