Does the credit paradox lead to overreliance on debt?

The credit paradox refers to the fact that when companies have low credit ratings, they tend to borrow more debt to make up for the funding gap, thus falling into a vicious cycle, leading to further declines in credit ratings. This phenomenon can make companies sink into a debt quagmire that is difficult to get out of.

A company's over-reliance on debt may lead to the following problems:

1. Increased financial risks: Over-reliance on debt may lead to an unstable financial structure of the company. Once there are problems in operations, it will face the risk of debt repayment difficulties or even bankruptcy.
2. Restrict investment and development: Excessive debt will increase the financial burden of enterprises, reduce operating free cash flow, and limit the investment and development space of enterprises.
3. Pressure management: Management needs to constantly deal with debt problems, deal with bank relationships, and raise funds, which increases the work pressure of management.
4. Affect on shareholders' interests: Over-reliance on debt may cause damage to the interests of corporate shareholders, because debt requires interest payments, which will affect corporate profits and dividends.

To avoid over-reliance on debt, managers can take the following measures:

1. Diversified financing channels: Don’t just rely on bank loans. You can consider issuing bonds, attracting investors and other financing methods.
2. Control financial risks: Establish a sound financial risk management system, control appropriate debt levels, and avoid excessive debt.
3. Improve corporate credit: Improve corporate credit ratings and reduce financing costs by improving corporate profitability, improving management levels, and strengthening corporate governance.
4. Properly plan the use of funds: Properly plan the use of funds to avoid using funds for ineffective investments and improve the efficiency of fund utilization.

For example, a company begins to rely too much on bank loans to maintain operations due to a decline in its credit rating. However, as debts continue to increase, companies begin to face debt repayment difficulties, which affects normal operations. In the end, companies had to cut costs, lay off employees, etc. to relieve financial pressure, which had a serious impact on the development of the company.