> But as soon as they need to roll over their debt, everything collapses. They'd need to increase revenues by 2-5x, and they can't.
That would imply that debt-servicing is their dominant cost. That seems wrong (e.g., a grocery store presumably spends a large fraction of its revenue on purchasing groceries from wholesalers).
The companies that are going to hit hardest are going to be in stuff like commercial real estate. That's where people have been flipping loans over at 1% interest rates in order to survive, living on the margin. As rates go up their debt service balloons and they'll no longer be able to survive given their vacancy rates.
That'll spill over into losses for the financial sector, possibly a CMBS meltdown and a financial crisis, which will spill over into the real economy.
All the job losses in housing and real estate and the hit to the financial sector will result in unemployed people who are no longer buying stuff so you'll see a contraction in everything consumption related. That'll lead to much lower ad buys, so that'll hit the ad companies. They'll all layoff staff which acts as a positive feedback loop.
Right now mostly we're just seeing companies whose CEOs see this coming down the pike who are laying off some staff early and trying to position better for the recession.
It isn't correct to say that e.g. Google's business is reliant on them flipping over loans cheaply, but they are certainly dependent upon other businesses in the economy being able to flip over loans cheaply.
That isn't quite right. What it implies is that debt service is a significant fraction of their margins, which is a subtle but actually quite significant difference.
If a grocery store makes 1% profit on each item it sells, and its debt service cost is 1% of its revenue (making it roughly "1% of its cost") a doubling of debt service cost wipes their margin to zero.
No! A 1% increase in revenue in this situation does make you profitable again, but only barely, and only with some possibly invalid assumptions.
Say you make $100 in revenue and $1 in profit, and $1 of your $99 in costs is debt service. Your debt service increases to $2, your profit drops to zero.
Now your revenue increases to $101, presumably your debt costs stay fixed (this is not a guarantee - revenue expansion costs money), but your non-debt-service costs scale as well, and they are now 0.98 * $101 + $2 in debt service = $101.98. Congratulations, your profits are positive again, but they are $0.02.
I am eliding here the general difference between fixed costs and variable costs, and so it's probably not true that your costs would scale quite this much with revenue, but it's much closer to the truth than that you'd be back where you started, esp. in a low margin business.
There's a reason margins are what they are in a competitive market. "Your margin is my opportunity," as Lord Bezos famously said. Only companies that have captured their market get to raise prices to cover new costs, and all it does is induce people who want to own that margin to find flaws in the business model. This is how Netflix wrecked Blockbuster, and how Amazon killed off chain bookstores.
Google the term "zombie company"; you'll find a lot of interesting stuff.
Bear in mind HN's view of the business world and profit margins and expenses is heavily skewed by the industry we work in, which remains one of the most profitable in the world across a wide variety of subsectors. The profit margin an incredibly profitable grocery or shipping company might have would be considered a danger flag for a tech company, and I don't just mean the big ones, either. A profit margin of 5% is not uncommon and 10% is doing extremely well for most businesses. It's easy to look at numbers in the millions or billions and think they can take anything because in absolute terms on a single human's scale they've got more money than you can imagine, but it doesn't necessarily take very much by percentage points before the profits of a normal company go "poof".
Debt servicing is a constant thing for businesses to be able to make payroll and acquire inventory for later resale or processing.
Based on your thoughts here I'm going to assume you haven't worked at a small business before. If you have it must have been awesome to work at a place that didn't have to borrow money constantly.
I've worked in small start ups before, but all boot strapped out of pocket / revenue. Wouldn't having to borrow money constantly be a red flag that the business is bad / not profitable?
Interesting, I can see this as lending implies some due diligence into a companies financials. At the same time, at the personal level, I know I can get lines of credit that would be very tough for me to pay back. Is corporate borrowing much more stringent?
Depends. If your income comes in 90 days post invoice, but you pay monthly then borrowing some money to smooth over cash flow makes loads of sense. If you need to buy loads of stuff to sell, it also makes sense. Software businesses are pretty weird in the lack of capital costs.
That would imply that debt-servicing is their dominant cost. That seems wrong (e.g., a grocery store presumably spends a large fraction of its revenue on purchasing groceries from wholesalers).