Cheap tenders and easy top-ups tempt every growing company into one more loan. The line between healthy leverage and a debt trap is thinner - and quieter - than most promoters realise.
There is a phase in almost every growth story that nobody names while it is happening. Sales are climbing, the order book is full, and every lender in the market wants to bank you. Facilities get sanctioned faster than you can draw them, top-ups arrive before you ask, and each new loan feels like a vote of confidence. This is the debt race - and it is exhilarating right up to the point where it isn't.
The danger is not any single borrowing. It is the imperceptible drift in what the borrowing is for. Early on, debt funds an asset that earns more than it costs - a new line, a bigger warehouse, a larger working-capital cycle to service a genuine order. Later, without anyone deciding it, a rising share of new debt is quietly servicing old debt. Growth borrowing has become survival borrowing, and the promoter is usually the last to see the switch.
The three signals that the race has turned
We watch for three things when a client asks us to look at their balance sheet. First, the trend in the interest-coverage ratio - not its level, its direction. A company earning six times its interest bill that slips to three over four quarters is telling you something a single snapshot never will. Second, the maturity ladder: if more than a third of your debt reprices or falls due inside twelve months, you are not managing leverage, you are rolling it. Third, the tenor mismatch - long-lived assets funded by short-term money is the single most common way a profitable business ends up illiquid.
None of these three show up in the P&L. A company can be growing revenue and profit every quarter while its debt structure quietly deteriorates underneath. That is exactly why the debt race is so seductive - the headline numbers keep confirming the decision to borrow.
Leverage is a tool, not a scoreboard
Somewhere along the way, promoters start comparing sanctioned limits the way founders compare valuations - as a proxy for how well the business is doing. A larger limit becomes a source of pride rather than a liability to be serviced. The reframe we push hard on is simple: debt is not capital you have raised, it is cash flow you have already spent. Every rupee of it has a claim on a future quarter's earnings, whether or not that quarter cooperates.
Used deliberately, leverage is one of the most powerful instruments a mid-market business has. It funds growth that equity would dilute, it disciplines cash flow, and it is far cheaper than giving away ownership. The problem is never leverage itself. It is unmonitored leverage - borrowing on autopilot because the money is available and the last loan worked out.
Getting out ahead of it
The companies that win the debt race are the ones that impose their own limits before a lender imposes them. Fix a leverage ceiling at the board level and defend it even when cheaper money is on offer. Match tenor to asset life as a rule, not a preference. Refinance the repayment wall while the business is healthy and the negotiating leverage is yours. And run a rolling twelve-month cash-flow model that treats debt service as the first call on cash, not the last.
This is precisely where an outside advisor earns their fee - because a promoter deep inside a growth story cannot easily see the drift, and a banker whose job is to lend is not the person to warn you that you have borrowed enough. Read the direction of the ratios, not just their level. The debt race is only dangerous for the people who don't know they are in it.
Written by
Paramjeet Singh
Writing field notes on finance, tax, process and infrastructure - from the work, not about it.
