Europe is experiencing a wave of social unrest that for now is mostly focused in the southern European countries. Rioters across France, Italy, Portugal, claim grievances related to school funding, subdued wages, and inflation to name a few.

Although the reasons are numerous and varied, most of these countries share similar economic situations. Particularly, enormous government debt burdens.

According to Eurostat, government debt as a percentage of GDP reached 140% in Italy, 119% in France, and 101% in Spain in the second quarter of 2026. Greece, at 141%, has an even larger debt burden.

For decades, governments have used borrowing to finance promises their economies couldn't sustainably afford. Borrowing allowed politicians to increase spending without immediately confronting the unpopular tradeoffs of higher taxes, lower spending, or structural reforms.

Borrowing more money doesn’t eliminate these tradeoffs. It kicks the proverbial can down the road.

As debt accumulates, an increasing portion of government revenue must be devoted to servicing past obligations rather than funding current needs or investing in future productivity.

Eventually, countries risk entering a debt spiral. Higher debt leads to larger interest payments, which require additional borrowing, spending cuts, or higher taxes. These measures can weaken economic growth, making the debt burden even harder to manage.

There are no longer good solutions, and the debt burden further limits the choices amongst the bad ones.

High debt burdens can have the same effect on businesses. Toys”R”Us was struggling in 2005 when private equity investors acquired the retailer in a $6.6 billion leveraged buyout.

The transaction left the company billions in debt. Private equity firms do this to increase their potential return but in doing so, leave them and their operating team very little room for error when implementing their turnaround plan.

Over the following decade, Toys "R" Us struggled to compete with Walmart, Amazon, and changing consumer preferences. Meanwhile, the company was spending approximately $400 million annually on interest payments.

Those were hundreds of millions of dollars that couldn't be used to modernize stores, improve its online shopping experience, or invest in other initiatives needed to remain competitive.

By 2017, Toys "R" Us had accumulated approximately $5 billion in debt and filed for bankruptcy.

Debt didn't single-handedly destroy Toys "R" Us, but it severely constrained the company's ability to operate and adapt in a rapidly changing retail landscape.

Debt is a powerful tool you can use to finance your future growth. Or it can just as easily consume the resources required to achieve it.

The difference comes down to what you're financing, how the debt is structured, and how much you can reasonably afford.

Debt is neither inherently good or bad. It allows you to bring future purchasing power into the present.

What you do with that purchasing power is what matters.

Productive debt increases your business's capacity to generate future cash flow.

For example, suppose you borrow $500,000 to purchase equipment that enables your business to produce an additional $250,000 in annual cash flow. Assuming those returns materialize and adequately cover the financing costs, the borrowing has increased your business's productive capacity.

Unproductive debt finances spending without meaningfully improving the company's ability to generate cash.

What if your business consistently loses $20,000 per month? Rather than address its pricing, costs, or operating model, you borrow $250,000 to cover the shortfall.

The financing hasn't solved the underlying problem. You have merely purchased additional time while adding interest and repayment obligations.

This is the same trap governments can fall into when borrowing finances commitments without expanding the economic capacity required to sustain them.

Of course, the distinction isn't always obvious. Borrowing to open a new location may seem productive, but if the location never generates sufficient cash flow, the investment can become a burden.

The lesson is simple, although often not easy.

Evaluate debt based on the future cash flow it can realistically generate or preserve, not simply what you intend to spend it on.

Even productive borrowing can create serious problems when the financing doesn't match the underlying economics.

When running a business, you would generally borrow for three reasons:

Working capital debt bridges the timing difference between spending money and collecting it.

Imagine a distributor that purchases $100,000 in inventory but won't collect from customers for 60 days. A revolving credit line can finance that temporary cash requirement.

Once customers pay, the business repays the borrowing and can draw again in the future when needed.

The key is that a known cash event is expected to repay the debt.

If you're continually borrowing to cover operating losses rather than temporary timing differences, you’re funding an unsustainable business not working capital.

Growth often requires spending money before the additional revenue arrives.

Hiring salespeople, expanding production capacity, or entering a new market may take months or years to generate positive cash flow.

Funding growth with debt can be risky. Unlike working capital financing, where repayment may depend on collecting existing receivables, growth debt depends on future performance that has yet to materialize.

The repayment schedule should therefore account for and align to the time required for the investment to generate cash.

Businesses also borrow to acquire long-lived assets such as equipment, property, or other businesses.

Here, debt structure is a bit more straight forward. The useful life and expected cash generation of the asset should guide the financing structure. That’s why home mortgages have longer terms than auto loans.

In your business, financing a piece of equipment expected to generate cash for seven years with a loan requiring full repayment in twelve months creates an unnecessary refinancing risk.

Across all three categories, the objective is the same:

Match the repayment obligations to the timing and reliability of the cash flow being financed.

Often, borrowers hyper-fixate on the interest rate. The loan term, required principal payments, collateral, personal guarantees, and covenants can matter just as much. As painful as it might be, read the fine print of your debt agreements.

A low-interest loan with restrictive covenants or aggressive repayment requirements can be far more dangerous than a more expensive loan that provides flexibility.

Even productive debt with an appropriate structure can become dangerous when there's too much of it.

While country indebtedness is often measured by Debt-to-GDP, business lenders use the Debt Service Coverage Ratio (DSCR).

It compares the cash flow available to service debt with the required principal and interest payments.

For example, if a business generates $300,000 in annual cash flow available for debt service and owes $200,000 in annual principal and interest payments, its DSCR is 1.5.

That means it generates $1.50 for every $1.00 of required debt payments.

But this ratio only tells part of the story.

What happens if revenue declines 20%? What if your largest customer leaves? What if you need to replace a critical piece of equipment?

More importantly, what happens if a compelling growth opportunity emerges but your existing debt obligations leave you unable to pursue it?

This is where debt becomes particularly constraining.

A business can remain current on every payment while gradually sacrificing the investments necessary to stay competitive.

Toys "R" Us is an extreme example of exactly this problem.

Before borrowing, model what happens when things don't go according to plan. A sensible amount of debt should leave room for unexpected expenses, disappointing performance, and future opportunities.

Debt is one of the many economic trade-offs business owners must make. You receive purchasing power today in exchange for committing a portion of your future cash flow.

Before you take on more debt, ask yourself three questions:

1. Am I financing productive capacity or postponing a difficult operating decision?

Will the borrowing increase future cash generation, or simply sustain a business model that needs to change?

2. Does the financing structure match the economics?

Consider when the investment will generate cash, when repayment is required, and what obligations or restrictions you're accepting.

3. What choices am I giving up?

Stress-test your ability to repay the debt while continuing to invest in the business, respond to unexpected problems, and pursue new opportunities.

Debt can be a powerful tool for building a business. But like the governments struggling with accumulated obligations, business owners can find themselves paying for yesterday's decisions at the expense of tomorrow's opportunities.

Even if you’re able to pay off the debt, you may spend years repaying it at the expense of the remaining potential in your business.

My goal with The Leap is to provide you each Saturday with the knowledge, tools and lessons learned to help you get started and keep going toward building your future. 

Whether you are making the leap to startups, solo-entrepreneurship, freelancing, side hustles or other creative ventures, the tools and strategies to succeed in each are similar.