Question

Understanding and properly utilizing debt is not only a key to success in business, it is a key to success in life. Debt, also referred to as leverage, can be both a valuable tool and a recipe for disaster. Describe scenarios with both a proper use of debt and an inproper use of debt. Please be specific as well as realistic. Don’t describe a scenario that wouldn’t be possible in today’s environment (in other words, the days of no doc mortgages where you are given a loan without revealing your income or other personal information are over).

Answer 1

Debt as mentioned is both a valuable tool as well a key to diasater. When a business approaches a bank for debt it is the reponsbility of the bank or other debt issuing authority to check for the credibility of the debt. if the debt seeker seeks loan for the purpose of business expansion, merger or acquiring, then the papers for the debt will have to scrutinized thoroughly. On the other hand when a business acquires more debt to pay off its pre-existing debts, then this becomes a disaster for the company since the organization adds up to the existing debt by acquiring more and more debt.

Banks on the other hand start leveraging for people in the business by having a trust in the organization and process the credits easily. But when the organization fail to pay back the debts is when the banks or the lending authority makes it worse for them. Mostly individual who pay their debts on time get top up credits for which no documentation or personal information is revealed since the banks already have them. These top up credits often end up as disasters for the business due to non-repayment by the debtors.