Borrowings / Debts

Borrowings/Debts refers to the money owing to the banks and other members of the public (through the use of bonds - long term / notes - short term). In the event that the company is unable to pay off these borrowings / debts on time, the company is very likely to end up in a highly undesirable position.

The ability to pay of borrowing / debts are especially crucial to the survival of the company. Hence, we must always ensure that the company is able to pay off their borrowings within the time frame stipulated, to protect ourselves. By protecting such downsides, we will be able to lower our risk exposure. :)

Just imagine, in the aspect of owing the loan shark money and we can't pay them. So there's a chance that loan shark might spray / splash paint on our wall, write our unit number at the lift, threaten us, hit us, pose danger to us or our loved ones etc but we won't be declared bankrupt. Just that our life will be more miserable and might be in danger if we can't pay up. Which is pretty scary right?

But when we owe bank money, and we can't pay up, there's only 2 results, either we become bankrupt and continue to slog and work so that we can pay back the money, or the mortgaged item will be possessed by the bank and they will sell it off to cover our debts.

Put this in the company's view. If the company can't pay up, there's also only 2 path, either it close down, or the bank will possess the item on mortgage and sell it off for money to cover the company's debt. But there could be a 3rd case that the government may want to save the company but this only applies if the company one that the government can't afford to let it close down.

Reference: Investopedia - Debt