Dive Savusavu Business

Posts Tagged ‘Leverage’

A Business LOC, while concurrently providing your business with additional capital needed to grow and finance your business, also acts a vehicle that you can use to generate a higher return on your business investment. Anytime you start a business, you most likely will have contributed capital towards the startup. For instance, let’s assumes that you start a small business and that you put $20,000 of your own capital into your company’s bank account. Let’s also assume that you acquire a $100,000 business line of credit that will be used to finance the inventory of your business. In this example, we will also assume that this business will make $60,000 of income in its first year of capital.

If we decided to forego the use of a business line of credit then we could put $120,000 of our own capital into our bank account. During this year of business, we would have generated a return of 50% on our investment. This is because we earned $60,000 on our $120,000 investment. However, by using a business line of credit (and earning the same $60,000) we have earned a return of 300% on our invested equity capital of $20,000.

However, with the use of leverage comes higher risk. Much like the extensive use of credit that caused the issues in the housing market – extensive use of credit can have the same negative effects on a business. In the event that the business does poorly, you will be responsible for the funds that you have borrowed. This is especially true if you have personally guaranteed to the business line of credit – and in today’s economy – it is almost certain that you will be required to do so unless your business has been established for a significant period of time. Banks, finance companies, and other institutions that grant business lines of credit have increased their borrowing standards immensely in order to curb future loses on business loans and business LOC.