what is deleveraging 
deleveraging is when a company or individual attempts to decrease its total financial leverage in other words deleveraging is the reduction of debt and the opposite of leveraging the most direct way for an entity to deleverage is to immediately pay off any existing debts and obligations on its balance sheet if unable to do this the company or individual may be in a position of an increased risk of default understanding deleverageleverage or debt has advantages such as tax benefits on the interest deducted deferred cash outlays and avoiding equity dilution debt has become an integral aspect of our society at the most basic level businesses use it to finance their operations fund expansions and pay for research and development however if companies take on too much debt the interest payments or cost to service that debt can do financial harm to the company as a result companies are sometimes forced to deleverage or pay down debt by liquidating or selling their assets or restructuring their debt if used properly debt can be a catalyst to help a company fund its long term growth by using debt businesses can pay their bills without issuing more equity thus preventing the dilution of shareholders earnings share dilution occurs when companies issue stock which leads to a reduction in the percentage of ownership of existing shareholders or investors although companies can raise capital or funds by issuing shares of stock the drawback is that it can lead to a lower stock price for existing shareholders due to share dilution the alternative is for companies to borrow money a company could issue debt directly to investors in the form of bonds the investors would pay the company a principal amount upfront for the bond and in return get paid periodic interest payments as well as the principal back at the bond s maturity date companies could also raise money by borrowing from a bank or creditor for example if a company formed with an investment of 5 million from investors the equity in the company is 5 million the money the company uses to operate if the company further incorporates debt financing by borrowing 20 million the company now has 25 million to invest in capital budgeting projects and more opportunity to increase value for the fixed number of shareholders companies will often take on excessive amounts of debt to initiate growth however using leverage substantially increases the riskiness of the firm if leverage does not further growth as planned the risk can become too much for a company to bear in these situations all the firm can do is delever by paying off debt deleverage may be a red flag to investors who require growth in their companies the goal of deleveraging is to reduce the relative percentage of a business s balance sheet that is funded by liabilities essentially this can be accomplished in one of two ways first a company or individual can raise cash through business operations and use that excess cash to eliminate liabilities second existing assets such as equipment stocks bonds real estate business arms to name a few can be sold and the resulting proceeds can be directed to paying off debt in either case the debt portion of the balance sheet will be reduced the personal savings rate is one indicator of deleveraging as people save more money they are not borrowing 1 