07/08/2026
WHEN BORROWING BECOMES DANGEROUS: LESSONS BUSINESSES CAN LEARN FROM THE SITUATIONAL AWARENESS CRISIS
No director wakes up one morning intending to lead a business into financial distress. Almost every step taken by a director is with great optimism.
Many distressed businesses therefore began with ambition, not bad moves, poor management or unprofitable operations. If you are ambitious, which is a good thing, you will expand into new markets, acquire more assets, hire more employees. This is growth. Growth is good and needs funds. This is where leveraging sets in gradually. Borrowing to finance growth on the assumption that tomorrow will be better than today.
This is how most distressed companies started off. For a while, their assumptions were right. Then circumstances changed.
Revenue slowed. Costs increased. Interest rates rose. Customers delayed payment. Exchange rates moved unfavourably. Banks became more cautious. Suppliers tightened credit.
Almost overnight, the same borrowing that had fuelled growth became the greatest threat to the business.
The recent financial difficulties experienced by the AI-focused investment firm, Situational Awareness, illustrate this vividly. Although the company operated in a sophisticated financial market far fetched from the day-to-day realities of most businesses, the underlying lesson is universal. Every business can relate with the fact that financial distress rarely begins with one catastrophic decision. More often, it is the consequence of a series of reasonable business decisions made with good intentions that eventually prove unsustainable.
The story of Situational Awareness is therefore not merely a story about a hedge fund in Silicon Valley. It is a cautionary story about growth, governance, liquidity and risk; one that offers valuable lessons for businesses across the globe. It is about leverage (borrowing) and financial resilience. These are issues that confront businesses across every sector of the world’s economy.
In July 2026, the investment community watched as Situational Awareness, the AI-focused hedge fund founded by Leopold Aschenbrenner, reportedly suffered significant losses following a sharp decline in AI-related stocks. The company was forced to dispose of a substantial portion of its portfolio after being placed under severe financial pressure. What placed it under this pressure? Excessive leverage (borrowing) and margin calls!!! Simply put, it borrowed heavily to invest in AI stocks and when the stocks temporarily declined, its creditors placed an urgent call on the company to make payment. The urgency may mean there was no ready cash to answer. What did it do? It sold off substantial assets to meet up.
To many observers, the episode appeared to be another Wall Street story involving hedge funds, sophisticated financial instruments and volatile technology stocks. However, for directors, business owners and lenders, the lessons are far more relatable than they may first appear.
Understanding Leverage
Leverage simply means using borrowed resources to finance business activities or investments. Leverage is actually an important driver of economic growth if well managed. It helps businesses to expand operations, acquire productive assets, enter new markets and undertake projects that would otherwise have been impossible. Most successful economies have been built, in part, on the responsible use of leverage. So the problem is definitely not the borrowing.
The problem is borrowing believing that favourable conditions such as continuous revenue growth, faithful customers, exchange rate stability etc. will continue indefinitely. Once one of those beliefs disappears, financial distress begins if no proactive measure are taken
The Reality
As a business, you may consider yourself as not highly leveraged. Yet, in practice, you have significant financial obligations, such as:
• bank overdrafts;
• term loans;
• equipment financing;
• trade credit from suppliers;
• foreign currency loans;
• shareholder or intercompany loans;
• lease financing; or
• commercial paper and other debt instruments.
None of these arrangements is inherently problematic. But together they may create a financial structure that leaves the business vulnerable to unexpected shocks where poorly managed.
Let’s take for example a tomato pastes manufacturing company that finances expansion through bank loan. The business performs well until exchange-rate depreciation significantly increases the cost of imported raw materials. Or insecurity and crises set in at the tomato farm causing poor or low harvest. Profit margins narrow; cash inflows weaken but loan repayments obligation goes nowhere.
Alternatively, let’s consider a construction company whose subscribers/clients delay payment for several months. Building material suppliers and lenders as well as staff continue demanding payment and salaries even though substantial sum of the company’s revenue remains unpaid by clients, shrinking the revenue.
These companies may still possess valuable equipment, contracts and receivables. Nevertheless, they may face financial distress because those assets cannot immediately be converted into cash. And cash is what they need at the relevant moment
The Difference Between Value and Liquidity
One of the most misunderstood concepts in business is the distinction between possessing valuable assets and possessing sufficient liquidity. A business may own properties, machineries, intellectual property, receivables (money owed the company) and yet none of these assets may provide immediate cash to satisfy urgent financial obligations.
This distinction became evident during the Situational Awareness crisis. Reports suggest that although the company retained valuable private investments, including interests in private AI companies, it nevertheless came under pressure because its lenders required immediate protection for the loans they had extended. At that moment, the company’s long-term investment calculations did not save it. Its immediate challenge was liquidity. Cash!!!
Every Business Has Its Own Version of a Margin Call
As a director or a business, you may be saying “Margin Call if far from me.” Many directors assume that margin calls exist only within investment banks and hedge funds. Margin call is simply your creditors unexpectedly asking for their money. In reality, every business experience margin calls in a way.
A tax authority suddenly computes your liability and commences enforcement
A lender demands additional collateral.
A supplier withdraws previously agreed credit terms.
An insurer refuses to renew cover without immediate payment.
A foreign parent requires repayment of an intercompany loan.
Staff go on strike demanding a raise
Each of these events produces the same commercial effect. The business is suddenly required to produce cash sooner than anticipated. Where sufficient liquidity does not exist, management is forced into difficult decisions, often including distressed asset sales, emergency refinancing or costly short-term borrowing.
What Is the Right Way to Leverage? Governance Matters More Than Confidence
One of the most important lessons from the Situational Awareness story is that intelligence and confidence do not eliminate financial risk. Many failed businesses were led by competent and visionary people. Financial distress will usually happen where management becomes increasingly confident that favourable conditions will continue.
For a successful leverage, proactive boards will need to ask some uncomfortable questions, such as; What happens;
If our largest customer defaults?
If revenue falls by 25%?
if foreign exchange instability doubles our debt servicing obligations?
If our principal lender refuses further financing?
The board further needs to ask, “What assets can realistically be converted into cash within thirty days?”
You should have ready answers to these questions before leveraging. If directors cannot answer these questions, but are already heavily leveraged, the business may already possess hidden vulnerabilities.
The Role of Early Restructuring
Perhaps the most significant misconception surrounding insolvency is that professional assistance becomes relevant only after collapse has occurred. Modern insolvency and restructuring practice are fundamentally concerned with preserving value.
Where financial stress is identified early, businesses may have several options available, including:
• restructuring existing debt;
• negotiating standstill arrangements with creditors;
• refinancing obligations;
• disposing of non-core assets in an orderly manner;
• improving working capital management; and
• implementing formal or informal restructuring solutions where appropriate.
The earlier these options are considered, the greater the likelihood of preserving enterprise value for shareholders, employees and creditors alike.
A Lesson for Directors Across the Globe
The recent challenges experienced by Situational Awareness should not be dismissed as a uniquely American hedge fund story.
The underlying financial principles apply equally to that manufacturing company in Aba, Nigeria, that technology startups in Ethiopia, that construction firm in Abu Dhabi, that oil service provider in Morocco and that multinational holding company headquartered in Ukraine with subsidiaries operating internationally throughout many cities of the world. The markets and industries may differ but creditor expectations and the principles for successful leveraging remain universal.
A successful leverage should mean that the resources borrowed was used to create more value that exceeded the risk and cost of borrowing the resources while maintaining a margin of safety. In the end, leverage in itself is not bad. It is leveraging without the discipline required that plunges a company into distress. Leverage (borrowing) is meant to accelerate success and not to make up for corporate weaknesses.
It is very important however to note that, successful businesses are not those that never encountered financial pressure. They are those that recognized financial stress early, responded decisively and preserved value before temporary liquidity challenges became permanent insolvency.
