When Debt Becomes Governance
We are taught that debt is "leverage"—a tool to amplify returns. But in a tightening economy, debt transforms. It becomes a governance mechanism. Your lender effectively becomes a board member with veto power.
The Covenant Cliff
Banks don't wait for you to run out of cash. They act when you breach a covenant. A breach technically puts you in default, allowing the bank to repricte risk, demand repayment, or appoint receivers.
The Hierarchy of Claims
*In a liquidity event, you are last in line.
Debt Service Coverage Ratio (DSCR)
The single most important number to a banker. It measures your ability to pay debt from
operating cash flow.
Formula: (Net Profit + Interest + Depreciation) ÷ (Interest + Principal
Payments)
Banks typically mandate a minimum of 1.25x. Below 1.0x means you are burning cash to service debt.
Regaining Leverage
When the bank holds the power, your strategy must shift from "growth" to "compliance & deleveraging" until you regain autonomy.
Proactive Disclosure
Tell the bank the bad news first. Bankers hate surprises more than losses. Control the narrative.
Cash Retention
Stop distributions. Build a cash buffer. Cash on hand is your only negotiating chip.
Asset Liquidation
Sell non-core assets voluntarily before you are forced to sell them quickly at a discount.
Deep Dive Analysis
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The Great De-Leveraging
Why paying down debt has suddenly topped the agenda for 73% of SME directors. Understanding the structural shift in leverage.
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