Are you struggling to build small business wealth?
If so, you need to start working smarter by applying the principles of leverage and small business financing.
Using leverage is when you go into debt to acquire something. Leverage is similar to other forms of debt. But when businesses use it correctly, it can increase company profits and returns, thus building wealth.
Keep reading to learn more about how to build wealth using leverage.
Types of Leverage
First, let’s understand more about leverage. Generally, there are three types of leverage. They are financial, operating, and combined leverage.
Financial Leverage
Financial leverage is the amount of debt in the company’s accounts. Using financial leverage to fund business operations can improve profits and shareholder returns without weakening ownership through equity financing.
However, too much financial leverage can lead to the risk of defaulting and going bankrupt. Thus, wealth building with financial leverage requires a balance.
You can use the debt to equity ratio to help determine how much debt your business can handle. This ratio shows the amount of debt your company has compared to your shareholders’ equity.
Operating Leverage
Operating leverage applies leverage to the cost of providing goods and services.
This idea comes from the breakeven analysis, which states two types of company costs. They are fixed and variable costs. Thus, operating leverage uses the ratio of fixed costs to variable costs.
Your business has high operating or capital-intensive leverage if you have more fixed costs than variable costs. Manufacturing companies that require large amounts of equipment fit in this category.
Conversely, labor-intensive businesses have fewer fixed costs but need human capital to run their companies.
Combined Leverage
Combined leverage is the total amount of risk facing a company. It brings together fixed costs, assets, and debt financing. With combined leverage, businesses can see the amount of leverage shareholders can use to borrow money for the company.
Knowing your combined leverage ensures you borrow enough money to succeed in your project but have minimal risk of failure.
Understanding Leverage
The idea of leverage is to use debt to embark on an investment or project. You want to multiply the returns from the investment or project.
While this is an excellent idea, it comes with risk. If the investment or project doesn’t go as planned, your business could end up with a lot of debt. This is why it’s essential to use the debt to equity and fixed costs to variable costs ratios to determine how much leverage to take on.
This way, your business is more likely to succeed in its goals and ambitions.
Start Building Wealth With Leverage
There are many ways to start building wealth for your business with leverage. All you need to do is find the right type of leverage for your business.
To get started with the business financing you need, give us a call at CAB Capital. We offer flexible and customizable small business lending options to meet your specific needs.