What Is Leverage and How Can Benefit Business with It?
Leverage is a nebulous concept for many people, but if you’re looking to wrap your head around it, you’ve come to the right place. This article defines leverage and provides business advice on how companies can use it.
Simply put, a business uses leverage when it employs borrowed money to buy new assets. For example, if a business takes out a loan to buy a new office in a new area, it has used leverage. Another form of leverage comes when a business raises money from investors through equity. The end goal of leverage is to use the funds to create even more revenue.
Uses of Leverage
People looking for business advice often wonder how best to use leverage. There is no single prescription because all businesses are different, but virtually all companies may be able to use leverage. For example, a manufacturing company might use leverage to build a new factory, in turn producing more goods for sale. A clothing company might use it to purchase additional inventory to meet growing demand. A production company might use leverage to purchase new equipment, such as cameras, allowing it to tackle more projects at once.
In all of these examples, the goal of leverage is to increase a company’s money-making potential.
Cautions on Leverage
Though leverage has many uses and has helped countless companies expand, it should be used with caution. A company that borrows too much may look unsavory to future lending partners and, most problematically, have trouble paying back its debt.
An important piece of business advice is that before using leverage, company leaders should ask themselves: Will these new funds produce enough money in the long run to make the extra debt worth it? If the answer is no, then the business should think twice. Used wisely, however, leverage can be a boon in the long run.
Commercial Capital Lending’s other blog posts offer lots of additional business advice, so be sure to check them out today!