FINANCIAL LEVERAGE
Benefits and limitations of financial leverage
For the capital required for the start of a business, some entrepreneurs may opt for alternative sources, while others may go for the option of leverages. These leverages have got their limitations as well as benefits, which might overpower the shortcomings. For the benefits, members of financial leverage may quickly and easily access capital and later experience an upgraded income, which isn’t the same as profit acquired without the use of leverages. Users yearning for acquisitions or buyouts could highly benefit from it. On the other hand, companies receiving very high leverages stand high chances of experiencing losses (Mims, Bearman, Moone & Pachlhofer, 2017). Debts are usually hard to pay for, and in case a company goes down on sales, it may end up collapsing due to the high leverage procured. It is, therefore, a risky financial alternative. Leverages are also very costly and complicated, whereby one requires time for comprehension. Leverages’ interest rates are very high as investors claim to involve themselves in very high risks.
Deciding factors to leverage plans
Before a company decides on choosing between a leveraged or conservative plan, it should put into consideration the purpose and amount of capital required, which are the main factors. The company’s emotional and financial strain also requires attention before the decision. A conservative leverage plan suffices for most of the companies, especially those with higher sensitive strains (Humphrey, 2020). The company does not entirely depend on the leverage for its capital; hence equity is not profoundly affected. While applying a conservative plan, there is prevention of lender risks, contrary to leveraged strategies where the lender might forcefully cause the company to sell at inappropriate periods. In case sales are not successful as planned, the company with a conservative plan might be able to pay off debts and still operate.
References
MIMS, Z., BEARMAN, B., MOONE, B., & PACHLHOFER, C. (2017). Leveraging Diversity Of Thought Through Inclusion: Advantages, Disadvantages, And Taking Advantage. Air Command And Staff College Maxwell AFB United States.
Humphrey, C. (2020). All hands on deck: how to scale up multilateral financing to face the Covid-19 crisis. ETH Zurich.