How a cash-flow shortage can ruin your good debt theory

I’ve argued about this notion of good debt verse bad debt and today we’re going to take a look at the murderous CASH FLOW CRUNCH and how it can ruin you over-night!

It doesn’t matter what the so-called “good debt” asset is. It can be a home, property, a business, or merchandise such as art that goes up in value. Whatever it is if you borrow to get the asset a cash-flow crunch can ruin you.

There’s a story in one of Larry Burkett’s books (Larry Burkett, by the way, was a Christian Financial Counselor and big believer in Debt Free Living). He wrote about an individual who had a business in Texas in the 70’s. He had $500,000 in the bank and his Accountant advised him to finance his accounts receivable.

He owed $350,000 in short term debt and way able to pay it because his customers were paying on time and everything was terrific.

In the 1980’s Texas went through a pretty severe recession and our business owner’s bank went out of business. He had $500,000 dollars in the bank but it was only insured for $100,000.

When the Fed’s took over the bank they contacted the business owner to tell him he now had $100,000 in the bank. He had lost $400,000 over night.

That was actually the good news. The bad news was that same bank had the short-term loan of $350,000 and the Fed Guys Called The Loan Due. This meant the business guy had to pay off the $350,000 dollars immediately.

But, he only had $100,000 because that same bank that went under shafted him out of $400,000.

Our business owner had to borrow an additional $250,000 dollars from another bank to make good on the loan. He now had no reserves and no money! The recession caused a 10% decline in his business and our business owner ended up going bankrupt.

The moral of the story and the thing that had made his wife really mad was she kept telling him to pay off all the debt. She could never understand why he had so much debt when he could have run the business completely debt free.

But, our business owner took his advice from the Accountant that told him some debt is good debt and you can write off the interest you pay on the debt and keep more money in the bank.

That strategy of good debt verse bad debt cost our business owner $150,000 and he went bankrupt.

The good dent theory doesn’t work when you have cash flow crunches and ultimately if you could pay off all your debt why wouldn’t you?

To debt free living…

David…