Debt’s vicious cycle / Ο φαύλος κύκλος του χρέους
Need cash -> Take loan ->
Pay interest -> Reduced cashflow -> Need cash -> Increase loan -> Pay interest
Let’s suppose that you need cash 100€, succeed in taking a loan 100€ and pay an interest of 2,5 % periodically. Let’s see where you stand now :
Need cash 100€ ->
Take loan 100€ ->
Pay interest 100 – (100 × 2,5%) = 2,5€ ->
Reduced cashflow 100 – 2,5 = 97,5€ ->
Need cash again 100€ ->
Increase loan 100 + 2,5 = 102,5€ ->
Pay interest 102,5 × 2,5% = 2,56€ (rounded) ->
Reduced cashflow 102,5 – (102,5 × 2,5%) = 99,94€
That is why financial organizations ask periodically for your turnover, profit margin and cashflow + guarantee. They want to know if everything works fine for them in any given period.
If not, they will need to tighten the conditions. Your profit should be at least equal to or greater than your installments (interest, principal, or both) owed to them.
They know that this is crucial to get their capital and interest back. This will be probably a long term relationship.
The need for cash is always there and interest is always there to help. Restless.
It is a business after all and someone has got to do it. And they (financial organizations) want to make sure that they will collect their capital + interest, no matter what. The sooner they do it, the higher the bonus. The how is another discussion.
#interest #do_the_math #loan #mindstormGR
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