A business is said to be overleveraged when it is carrying too much debt and is unable to pay interest payments from loans and other expenses. Overleveraged companies are often unable to pay their operating expenses because of excessive costs due to their debt burden, such as interest payments and principal repayments.
Overleveraging can sometimes lead to a downward financial spiral where the company cannot generate enough revenue to make the debt payments and pay its usual operating expenses. This leads to the company having to borrow more to stay in operation, and the problem gets words. This spiral usually ends when the company closes its doors or files for bankruptcy protection.
Breaking Down Overleveraged
Overleveraging occurs when a business has borrowed too much money and is unable to pay interest payments, principal repayments, or maintain payments for the businesses' operating expenses due to the debt burden. Companies that borrow too much and are overleveraged are at the risk of becoming bankrupt if their business does poorly. Taking on too much debt places a lot of strain on a company's finances because the cash outflows dedicated to handling the debt burden eat up a significant portion of the company's revenue. A less leveraged company can be better positioned to sustain drops in revenue because they do not have the same expensive debt-related burden on their cash flow. Businesses that borrow money to add to a product line, expand internationally, or upgrade their facilities are often better able to offset the risk they take on when borrowing.