The psychology of business debt

August 8, 2023


There is so much advice for individuals who are struggling with personal debt, but, unfortunately, when it comes to borrowing by businesses, company owners and managers are pretty much on their own when it comes to their business debt. Many of the accepted norms of previous commercial generations on topics like leverage and shareholders committing to a company by locking in their investment as equity have fallen by the wayside. Nobody seems unduly bothered by businesses with 100%+ gearing, at least not until something starts to go wrong.

Why do companies borrow?

There are various perfectly valid reasons to take on debt and some seriously inappropriate ones. There’s nothing wrong with funding working capital requirements with debt, especially if the facility is flexible enough to grow as the company does. Likewise, expansion, provided it is profitable expansion. Borrowing for capex projects is a well-established principle, again with the caveat that this is best done with asset-based lending. Raising debt to fund acquisitions is a more complex topic, but not unacceptable per se.

Where the trouble starts is when borrowings are to cover losses under the familiar ‘blue skies’ approach of expecting something positive to turn up to generate the cash to service and repay the additional debt. This can be excusable in extraordinary situations like the Pandemic and with Coronavirus Bounce Back Loans, but as many businesses have discovered, if the recovery never comes, or is too long delayed, then the debt becomes an albatross slung round the company’s neck

They won’t ever ask for their money back, will they?

Most business rescue experts can tell war stories about bemused business owners, struggling with the concept that their lender has reduced their facility or called in the whole debt. Others are baffled by a bank’s refusal to increase its lending to a clearly struggling business. Here too, Bounce Back Loans are a topical example, where some borrowers clearly but mistakenly thought that the government guarantee and the prohibition on taking personal guarantees from directors meant that if all else failed, they and their company could just walk away from the debt.

Personal guarantees

When a lender takes a PG, the intention is usually to ensure that the entrepreneur has, in that awful modern phrase, ‘skin in the game’, especially when the bank is being asked to provide more debt than the owners have committed to equity. Whether a PG changes the attitude of directors to company debt is much debated. Some PGs are given without as much thought as necessary, on the basis that the company’s assets will always pay off the debt, or that a fellow guarantor will stump up the money. Other guarantors may harbour eternal optimism that their business could ever fail.


You may also be interested in: The business decline curve – how delay can destroy rescue options

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Emotional damage of business debt

A business debt is not just a financial burden for the company. It can also take an emotional toll on owners and directors and this should not be under-estimated. One common effect when businesses start to head into difficulties is that worries about debts paralyse some or all of the management team. All high level thinking and action ceases as the crisis mounts; curiously it is often replaced by all sorts of irrelevant and unproductive ‘displacement’ activity, through which management convince themselves that at least they are doing something, even if it might be useless.

Anxiety, guilt and inhibition

Even before the crisis stage, does debt create the sort of mindset that clips the wings of entrepreneurs? Might it curb their natural approach to risk and lead to missed opportunities? If the borrowing was for the right reasons, based on a risk-aware assessment of taking the money, then this shouldn’t occur. Unfortunately, human beings are complex beasts. Management teams may also have divided opinions, leading to stresses and conflicts.

Getting help with business debt

Business owners and managers are often too close to their businesses to see issues clearly, or they may lack the experience and the ‘bandwidth’ to deal with a debt crisis. There is no shame in reaching out for help from expert professionals to get an independent, unbiased assessment of the situation and be offered options for dealing with the problems

How we can help

We have extensive experience advising business owners and management teams, and we will always work with you to find the best solution for you and your business.

One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at or call us on 020 3326 6454 and we will arrange for a call with one of our Partners.

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