It Pays to Not Pay Your Debts

The way business works is that you have some assets and they’re funded by some liabilities. The assets generate some income which you use to pay back the liabilities. You borrow some money, you buy a machine for your factory, the machine makes widgets, you sell the widgets, you get money, you pay back the money you borrowed, you have some money left over as profit, life is good. One way to make more profit is to make the assets worth more, to make them produce more income; if you can tune up the widget machine to make more widgets then you will have more profit.

Another way to make more profit is to make the liabilities worth less. This is the weirder way. If you borrow $100 to buy a widget machine, and the widget machine produces $120 of widgets, then you have $20 of profit. If you go to your lenders and say “instead of $100 what if I paid you back $75?” and they say “sure that's fine no problem” then you have $45 of profit. You got an extra $25 of profit from not having to pay off all your debt. Why would that work? It doesn’t generally work. But sometimes it could.