The harsh realities of excessive debt

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Congress has muddled through the debt-ceiling crisis, but it’s obvious the problem is not solved. Not only has the nation’s debt rating been lowered, but massive deficit spending remains the norm in Washington, D.C. We’re still going to hell in a hand basket, just at a slightly lower pace.

On a smaller scale, any owner-operator who’s worked his way out of thousands of dollars of red ink can tell you what it’s like when compounding high-rate interest payments overwhelm you like Nazi gunfire at Omaha Beach. There’s no easy fix.

Still, debt is often part of doing business. So at what level does it become dangerous?

That’s been a key question in the debt ceiling debate. Liberal economists say borrowing is an elastic tool to make things work, especially in a recovery. Yet no one seems to know the tipping point where the nation is so over-committed financially that recovery becomes an illusion.

I read one explanation of the situation comparing the nation’s finances to a household with $50,000 income. That household would be paying almost $10,000 a year in interest on a $325,000 debt. It would expect to borrow $36,000 to cover next year’s spending of $86,000.

The last time Overdrive research measured owner-operator debt levels, 2006, single-truck operators had average business debt of $26,600. More than three-fourths of operators had a business debt-to-revenue ratio of 40 percent or less. Those at the upper end might have been OK if a big part of that debt was a relatively new truck loan, and there was enough revenue to steadily pay it off.

The scary subset of those respondents was the one in six with business debt at 50 percent of revenue and higher, especially if a truck loan was not part of that debt. Many of them would be weeded out of owner-operator ranks in normal economic times, yet alone in the recession that began in 2008.

The knee-jerk response for owner-operators in dire straits is to keep borrowing, just as our government has done. Between 1940 and 2010, Congress increased the debt limit more than 70 times.

Granted, our economy has grown and can afford more debt, but $14.3 trillion is overwhelming our ability to make ends meet. Government debt was less than 30 percent of the gross domestic product during part of the 1970s. Now it’s about 98 percent and the sky’s the limit as we continue massive deficit spending ($1 trillion and counting for this fiscal year).

Learn from this. Unless your business is a small fleet experiencing steady growth, you can’t afford to raise your debt ceiling once a year. You can’t afford delinquent debt payments or other sloppy business practices that will trash your credit rating. You can’t afford to buy a truck, no matter the price, without a clear plan to pay it off and to save enough to maintain it.

If you’re not sure what level of debt is safe for your operation, consult with your accountant – not your congressman.

The Business Manual for Owner-Operators
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