Why you should avoid financial leverage?

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By: MJ Gonzales | Executive Chronicles

Financial leverage is one of the many choices to help you fund your business.  In fact, getting loans is reasonable to make one’s enterprise progress continuously and rapidly. However, some think it’s better to try bootstrapping than to borrow money with interest.

In defense to financial leverage it can be good or bad debt  depending on the capacity, strategy, and mentality of the borrowers. According to Enterprising Investor’s example, if the use of leverage can improve a business’ production, which can increase income as well, that’s a good leverage. However if that borrowed money only use for expenditure, then it’s considered a bad leverage.

EI also cited important notes about financial leverage such as level of interest to be paid and tax incentive for those willing to avail. The third and important note is the “leverage increases the volatility in the value of the investment.” To explain the latter, let’s say Mr. Juan invest in a brand new vehicle for his transportation business. If Mr. Juan pays the vehicle’s amount by 50% from his savings and 50% from a loan, then his investment’s worth is volatile.

Meantime, Presumptive Republican nominee Donald Trump had negative business experience 25 years ago due to bad leverage as per Warren Buffet.  In the Berkshire Hathaway founder’s speech at Notre Dame to MBA and undergraduate students in 1991, which shared and published on TilsonFunds.com,   he cited that Trump’s failure rooted from his “terrific” money borrowing and overpaid assets.

“I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. Donald Trump failed because of leverage. He simply got infatuated with how much money he could borrow, and he did not give enough thought to how much money he could pay back,” the renowned successful investor said.

Credit: Pixabay
Credit: Pixabay

In Yahoo’s report, in two consecutive years Trump asked for bankruptcy protections first for The Trump Taj Mahal [1991] and The Trump Plaza Hotel [1992].

“You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing. I’ve never borrowed a significant amount of money in my life. Never. Never will. I’ve got no interest in it,” Buffet’s sentiment.