Warning signs and how to avoid the debt trap
Let’s say it straight: borrowing money isn’t the issue. In fact, the right kind of debt, at the right time, can be the very thing that helps you scale, stabilize, or seize opportunity.
But too much debt, taken for the wrong reasons, is where problems begin.
At Mount Fuji Lending, we’ve seen this unfold more times than we’d like. A promising business starts taking on loan after loan, sometimes from different providers, sometimes in overlapping terms. The pressure builds. Margins shrink. Business slows. And suddenly, the owner isn’t just running a business, they’re juggling repayments.
This is what it means to be over-leveraged. And while it’s a word often used in corporate boardrooms, its impact hits even harder for small and medium enterprises.
So, how do you know if your business is over-leveraged, and what can you do before things spiral?
Let’s break it down.
What does it mean to be over-leveraged?
In simple terms, over-leverage happens when your business carries more debt than it can realistically handle, based on your income, cash flow, and operating capacity.
It’s not just about how many loans you have, it’s about how well you’re managing them in proportion to your business’s financial health.
Here’s the thing: You don’t need to be drowning in debt to be at risk. Sometimes, even just one poorly structured loan can tilt everything off-balance.
5 Signs You Might Be Over-Leveraged
1. Loan repayments are eating into your operating budget
If you are grappling with excessive debt, a major warning sign is the diversion of funds meant for daily operations to cover debt obligations. This is evident if you are:
- Adjusting salaries
This may include delaying payroll, cutting wages, or laying off staff to free up cash, severely affecting employee morale and productivity. - Delaying payments to suppliers
Extending payment terms or defaulting on vendor payments can harm vital business relationships and interrupt supply chains. - Skipping inventory restocks
This directly impairs your capacity to meet customer demand, resulting in lost sales and decreased customer satisfaction.
2. You’re borrowing just to repay existing loans
Taking out a new loan just to meet payments for an old one is a slippery slope. It’s a sign of short-term survival, not long-term growth.
3. You’ve lost sight of what each loan was even for
If you can’t easily explain what a loan was used for or how it helped your business, there may be a mismatch between borrowing and strategy.
4. Multiple lenders are pulling you in different directions
Different lenders, different terms, different interest rates, all managing you instead of you managing them. This lack of central visibility increases the risk of overextension.
5. Your stress is constant, even when revenue looks okay
Sometimes, your books may not be in the red, but you’re exhausted trying to keep it that way. If your personal well-being is suffering, it’s time to reassess.
These actions are desperate measures to manage debt, signaling that your business is likely over-leveraged, carrying too much debt relative to its cash flow generation. This financially unsustainable approach can trigger a relentless debt cycle, endangering the business’s long-term survival.
Why This Happens to Good Business Owners
Let’s be honest: this doesn’t happen because SME owners are careless. It happens because:
- Capital feels abundant.
With pre-approved offers, “instant loans,” and aggressive marketing, funding is more available than ever. But not all of it is designed with your best interests in mind. - There’s pressure to always say yes.
Business owners are told that opportunity moves fast, and that capital is the key. So they say yes, even when the terms don’t align with their cycle. - Lack of financial visibility.
Not all SME owners have the time or tools to assess leverage ratios or project cash flow three months ahead. So borrowing happens in reaction, not reflection. - Borrowing feels like progress.
There’s a psychological boost when a loan lands in your account. It feels like movement. But if that cash doesn’t flow into productive use, it becomes expensive optimism.
How to Prevent Over-Leverage Before It Happens
We often say: don’t just look at how much you can borrow, look at how much you should.
Here’s what that means in practice:
1. Run a debt health check
Take stock. List all your current debts, amounts, interest rates, terms, repayment dates. See what portion of your monthly revenue goes into paying them.
If more than 30–40% of your net monthly income is going to debt servicing, it’s time to slow down and reassess.
2. Align borrowing with your cash flow cycle
Is your income seasonal? Your payments should be, too. If your loan terms don’t reflect how and when you make money, you’ll always be chasing stability.
3. Avoid borrowing just because you can
Being offered ₱1 million doesn’t mean you should take it. Borrow what you need, not what looks good on paper.
4. Look at your ROI
Ask: “Will this loan generate more revenue than it costs me?” If the answer isn’t clear, it may not be the right time to borrow.
5. Choose lenders who ask better questions
Not every lender wants what’s best for your business. If the conversation is purely about interest rates and approval speed, with no talk about your context, goals, or financial health, be cautious.
At Mount Fuji, we’re not just interested in what your numbers look like today, we care about how this loan will serve your business tomorrow.
When Borrowing Becomes a Cycle, Not a Strategy
Some of the most eye-opening moments happen during our internal postmortems. We’ve seen it:
- Borrowers with multiple loans from five or more institutions
- Accounts flagged by BIR due to poor financial documentation
- Businesses with large amounts of cash sitting idle because it came in bulk, fast—but wasn’t mapped to a need
It’s not always about lacking discipline. Sometimes it’s about lacking clarity.
Borrowing becomes a reflex, not a plan. And soon, it becomes addictive.
How We Think About Healthy Debt at Mount Fuji
For us, “healthy debt” means:
- Clear purpose. You know what it’s for and how it supports your next step.
- Aligned structure. Your payments match your income rhythm.
- Mutual accountability. You grow, we grow. If you’re stretched too thin, we don’t push it.
- Exit strategy. From day one, we want you to know how and when you’ll pay it off.
Because lending should never be about keeping you in a cycle. It should be about moving you forward.
Control the Debt, Don’t Let It Control You
Borrowing is not the enemy. But borrowing without strategy, visibility, or self-awareness can quietly turn into the thing that holds your business back.
If you’re unsure whether your current debt is helping or hurting, you’re not alone. Many business owners find themselves in this space. The good news? There’s always a way forward.
We’re here to help you find it, with honesty, empathy, and structure.
Let’s make sure your next loan fits your future, not just your present.
