July 22, 2025 • 18 mins
Financial leverage is a strategic tool that can amplify business growth when used correctly, not just debt as a burden. Smart, strategic borrowing becomes a superpower for your business by amplifying returns, speeding up growth, and allowing you to maintain full ownership while gaining tax advantages.
• Understanding the debt-to-equity ratio (ideally below 1.0) helps measure if you're using leverage responsibly
• Leverage works best for specific scenarios like bridging working capital gaps, funding expansion, or increasing efficiency
• A dental practice example showed how leverage turned a 10% return into a 40% return through strategic expansion
• Different financing options serve different needs: lines of credit for flexibility, term loans for major purchases, SBA loans for those who might not qualify conventionally
• Conducting thorough ROI analysis before borrowing ensures the debt will generate sufficient returns
• Managing leverage requires disciplined tracking, comparing results to projections, and monitoring cash runway
Ready to see what your business qualifies for with no hard credit pull or upfront fees? Visit biteme.ai/lendix-preapproval to find out in about 60 seconds.
#SmartBusinessFunding #FinancialLeverage #BusinessGrowthTips #EntrepreneurFinance #ROIstrategy #DebtToLeverage #SmallBusinessTips
#BusinessLoans101 #FundingWithoutFees #ScaleWithStrategy
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
So have you ever been there?
You're running your smallbusiness.
You've got these amazing ideas,big plans for growth, right,
but the bank account it feelslike it's always just stretched
a bit too thin.
Speaker 2 (00:13):
Yeah, that's a feeling a lot of business owners
know well.
It's almost universal.
Speaker 1 (00:17):
Exactly Right.
But what if I told you the keyisn't just having more money,
but maybe using capital in asmarter way?
There's this tool financialleverage.
Leverage that often gets a badrap.
Speaker 2 (00:28):
People just think debt that's a really critical
point to start with.
Today we are doing a deep diveinto financial leverage and yeah
, if that word leverage justmakes you think of, you know,
scary loans and risk, let's tryand shift that perspective,
because this isn't about justborrowing money recklessly.
It's about understanding howsmart, strategic borrowing can
(00:48):
actually become a kind ofsuperpower for your business.
Speaker 1 (00:51):
A superpower.
I like that.
Speaker 2 (00:52):
Yeah, amplifying returns, speeding up growth in
ways maybe you haven't evenconsidered.
Speaker 1 (00:56):
All right.
So our mission today, in thisdeep dive, is really to give you
, the business owner listening,a kind of roadmap.
How do you turn those feelingsof limitation into well, real
growth?
Speaker 2 (01:08):
We're going to unpack what financial leverage
actually is.
Look at how you canstrategically apply it, figure
out how to manage it withoutgetting into trouble, and help
you see when and how it fitsyour specific business goals.
Speaker 1 (01:21):
Think of this as maybe a shortcut right, Getting
you the essential info onexpanding your business without
feeling totally overwhelmed byfinancial jargon.
You should feel empowered afterthis.
Speaker 2 (01:30):
Okay, let's dive in then.
What is financial leverageFundamentally?
Forget the scary connotationsfor a second.
Think of it more like a leverand a fulcrum in physics.
At its core, it's usingborrowed money yeah, that's the
debt part but using it toincrease the potential return on
your own money, your owninvestment.
It's about making your capitalwork harder for you.
Speaker 1 (01:52):
Right.
So it's not just debt as aburden, it's debt as a tool to
amplify what you already have.
Speaker 2 (01:58):
Precisely.
It ties right into that oldsaying you know you have to
spend money to make money.
Speaker 1 (02:03):
Leverage lets you do that, saying you know you have
to spend money to make money.
Leverage lets you do that.
It lets you invest in those biggrowth moves, maybe expanding
your space, buying anothercompany, getting new tech
without and this is key withoutdraining all your cash reserves.
Speaker 2 (02:16):
That's a huge point and unlike, say, getting equity
investors, where you're sellingoff parts of your company.
Speaker 1 (02:23):
Right With debt financing.
You keep full ownership, youkeep control, Plus there's a
nice little bonus.
People often miss the interestyou pay on that debt.
It's usually tax deductible.
Speaker 2 (02:32):
Oh, interesting.
So that actually lowers thereal cost of borrowing.
Speaker 1 (02:35):
Exactly.
It gives debt a financial edgethat equity financing doesn't
have in that specific way.
Speaker 2 (02:41):
And you mentioned predictability earlier Having a
set repayment schedule that canactually make managing cash flow
clearer.
Maybe it can, yeah.
Speaker 1 (02:49):
It forces a certain discipline.
But OK, if we're using debtstrategically, how do we measure
if we're doing it right?
How much is too much?
Is there a metric?
Speaker 2 (02:58):
Yeah, how do we gauge that?
Speaker 1 (02:59):
There is and it's a really important one the
financial leverage ratio.
You might also hear it calledthe debt to equity ratio.
Speaker 2 (03:05):
Debt to equity.
It sounds fancy, but thecalculation is pretty
straightforward.
You just take your total debteverything you owe and divide it
by your shareholder's equity,the owner's stake in the company
Got it.
Our sources mentioned ahypothetical company, scrifty.
Let's say they had $110,000 intotal debt, like accounts,
payable loans etc.
And they had $200,000 inowner's equity.
Speaker 1 (03:28):
Okay, so $110,000 divided by $200,000.
Speaker 2 (03:31):
Comes out to $0.55.
Speaker 1 (03:32):
Right, and what does that $0.55 tell us?
Is that good, bad?
Speaker 2 (03:35):
That's generally considered pretty good, Really
solid actually.
It tells lenders, investors,anyone looking at the books,
that Scrifty is using debt butthey're not overly reliant on it
.
There's more equity backing thebusiness than debt.
Speaker 1 (03:47):
So less than one is the target zone.
Speaker 2 (03:48):
Yeah, generally speaking, a ratio under one is
seen as healthy.
Once you get above one, itmeans you have more debt than
equity and the business startslooking riskier to outsiders.
So keeping it below one, likeScrifty's 0.55, definitely helps
when you need more fundinglater.
Speaker 1 (04:03):
Okay, that makes sense.
So leverage can be powerful.
The ratio helps us measure it.
Now let's get really practicalFor the small business owner
listening when does taking ondebt stop being, you know, just
a scary thought and become asmart, strategic move?
Speaker 2 (04:18):
Right.
When is it necessary?
Often, it boils down to a fewkey situations where debt really
acts like fuel for the fire.
A super common one is bridgingworking capital gaps.
Speaker 1 (04:30):
Okay, like what?
Speaker 2 (04:31):
Well, imagine you land a huge new client Awesome
right.
But maybe you need to buy a tonof inventory up front or hire
temporary staff and you won'tget paid by the client for, say,
60 or 90 days.
Speaker 1 (04:44):
Ah, the classic cash flow crunch.
Speaker 2 (04:45):
Exactly.
A working capital line ofcredit is perfect for that.
It bridges that gap so you canpay your suppliers, make payroll
and keep things runningsmoothly until the client's
payment comes in.
Speaker 1 (04:55):
That makes sense.
What about bigger picture stufflike actual expansion?
Is it always about like buyinga bigger building?
Speaker 2 (05:01):
Not necessarily, though that's definitely one use
case.
Expansion can mean lots ofthings.
It could be investing in new,more efficient equipment, maybe
automating part of your processRight.
It could be acquiring acompetitor or a complementary
business, or even investing in abig software upgrade like an
ERP system to manage everythingbetter.
Those things often requiresignificant capital up front.
Speaker 1 (05:23):
And maybe buying out a partner.
Speaker 2 (05:24):
That too.
Funding a business transitionlike a partial owner buyout
often needs external financing.
Speaker 1 (05:30):
Let's make this real.
Our sources had a great exampleSally the dentist.
Speaker 2 (05:34):
Ah yes, Sally's story is a perfect illustration.
She had a small 2,000 squarefoot office and she was totally
outgrowing it.
She needed to expand.
Speaker 1 (05:42):
And she had options right.
Speaker 2 (05:43):
Two main paths.
Option A use $200,000 of herown cash to buy a 5,000 square
foot office.
The projections showed thatwould likely generate about
$20,000 in profit.
Speaker 1 (05:56):
Pretty straightforward, okay.
What was option B?
Speaker 2 (05:58):
Option B was the leveraged approach.
She used only $100,000 of herown cash, then borrowed $600,000
from the bank, let's say at 5%interest, to buy a much larger,
10,000 square foot office.
Speaker 1 (06:10):
Wow, much bigger leap .
How did that turn out?
Speaker 2 (06:12):
Well, that bigger space allowed for more chairs,
more services, maybe bringing inspecialists, and it resulted in
a $40,000 profit for Sally$40,000.
Speaker 1 (06:20):
So double the profit of option A.
Speaker 2 (06:21):
Exactly.
But here's the kicker.
Think about her return on herinvestment.
In option A, she invested $200Kand got $20K profit.
That's a 10% return.
In option B, she only invested$100 of her own money and got
$40K profit.
That's a 40% return on her cash.
Speaker 1 (06:39):
That's huge.
The leverage totally amplifiedher return.
Speaker 2 (06:43):
Massively.
It shows how even borrowingamounts like $50K, $100 or even
more, when used smartly, cangenerate much higher returns
than just using your own limitedcash.
Speaker 1 (06:53):
Any other quick examples?
Speaker 2 (06:54):
Yeah, there was one about a small manufacturer.
They made high-end weddingbands using get this meteorite
fragments Very niche, veryexpensive material.
Speaker 1 (07:02):
Oh, okay.
Speaker 2 (07:03):
They took out a loan, maybe in that $50K $100K range,
to buy a new precision cutter.
This thing dramatically reducedmaterial waste, paid for itself
in under a year, basicallydoubled the amount of usable
meteorite they got from eachpiece.
Huge boost to their productmargins.
Speaker 1 (07:18):
So that's using debt for efficiency gains, which
leads to profit.
Speaker 2 (07:21):
Exactly, and it's not just physical stuff.
Another company used debt todouble their marketing budget.
They ran these pre-roll videoads.
Speaker 1 (07:30):
OK, Risky maybe.
Speaker 2 (07:32):
Well, they tracked it carefully and for every $1 they
spent on those ads, theygenerated $3 in return, expanded
their brand, got more customers.
That's using debt directly forrevenue generation.
Speaker 1 (07:43):
So it really is versatile.
Retailers using it forinventory, restaurants for new
locations or kitchens servicebusinesses, maybe hiring more
people.
Speaker 2 (07:51):
Precisely Manufacturers buying property to
build equity and control costs.
Each industry finds ways to useleverage strategically.
Speaker 1 (08:00):
Okay.
So if you're convinced thatstrategic debt might be right,
you quickly realize debt isn'tjust one thing.
There are all these differenttypes of financing out there.
How do you choose the right one?
Speaker 2 (08:11):
That's a great question, because using the
wrong tool can cause problems.
It really depends on what youneed the money for and how you
need to access it.
Speaker 1 (08:18):
So what are some common tools?
Speaker 2 (08:19):
Well, for ongoing flexibility, day-to-day stuff, a
business line of credit isoften a go-to.
Think of it like a credit cardfor your business, but usually
with a higher limit and maybebetter REITs.
Speaker 1 (08:29):
Revolving right, you draw pay back, draw again.
Speaker 2 (08:36):
Exactly.
It's ideal for managing thosecash flow ups and downs.
We talked about handlingseasonal peaks, like buying
extra inventory before theholidays or just having a safety
net for unexpected costs.
And the big plus you only payinterest on the amount you've
actually drawn down, not thewhole credit line.
Speaker 1 (08:51):
MARK MIRCHANDANI, that flexibility seems really
useful, but what about thosebigger one-off investments like
Sally buying the building or themanufacturer buying the cutter?
Speaker 2 (09:00):
SARAH BALDWIN.
For those kinds of large,specific purchases with a longer
lifespan, a business term loanis more typical.
You get a lump sum of cash upfront and you pay it back in
regular installments over a setperiod could be a few years,
could be longer for real estate.
Speaker 1 (09:13):
So more structured, predictable payments.
Speaker 2 (09:15):
Right, Better suited for financing assets like major
equipment, property or evenbuying another business.
It has a clear start and enddate for repayment.
Speaker 1 (09:23):
What about smaller needs, like maybe just a few
thousand dollars?
Speaker 2 (09:27):
Business credit cards can fill that gap, especially
for needs under, say, $5,000.
They can be easier to qualifyfor, especially for newer
businesses, and using themresponsibly is a great way to
start building your businesscredit history.
Many card issuers report to thebusiness credit bureaus.
Speaker 1 (09:44):
Okay, and then there are SBA loans.
We hear about those a lot.
Small business administration.
Speaker 2 (09:49):
Yes, sba loans are a huge resource.
They aren't direct loans fromthe government, but the SBA
guarantees a portion of the loanmade by a partner lender, like
a bank.
Speaker 1 (09:59):
Which makes the bank more willing to lend.
Speaker 2 (10:01):
Exactly.
It reduces the bank's risk, sothey're often available to
businesses that might not quitequalify for a conventional bank
loan.
They often come with benefitslike longer repayment terms and
sometimes lower down payments.
Speaker 1 (10:12):
Are there different kinds?
Speaker 2 (10:13):
Oh yeah, there are several programs.
Two common ones are SBA ExpressLoans, which go up to $350,000
and are often used for workingcapital or expansion, and are
often used for working capitalor expansion, and the flagship
SBA 7A loan program, which cango up to $5 million for bigger
things like major acquisitions,startup costs or buying
commercial real estate.
Speaker 1 (10:37):
Gotcha.
Speaker 2 (10:38):
I also saw net 30 accounts mentioned.
That sounds different.
It is.
Yeah, it's actually a form oftrade credit, not a loan in the
traditional sense.
It's basically getting termsfrom your suppliers.
Speaker 1 (10:44):
Like buy now, pay in 30 days.
Speaker 2 (10:46):
Exactly.
You get supplies or inventoryand the vendor gives you 30 days
, or sometimes 60 or 90, to paythe invoice.
If that vendor reports yourpayment history to the business
credit bureaus and many do it'sa fantastic, often easy way to
start building your businesscredit profile, establishing
those trade lines lenders lookfor.
Often they don't even checkyour personal credit.
Speaker 1 (11:07):
Simple but effective.
Any others worth a quickmention.
Speaker 2 (11:09):
Well, you sometimes hear about merchant cash
advances or MCAs.
These aren't loans either.
They're an advance based onyour future credit card sales.
Repayment is typically apercentage of daily sales.
Can be quick funding, but oftenvery expensive.
Speaker 1 (11:23):
Okay, good to know.
Speaker 2 (11:24):
And invoice financing or factoring, where you
essentially sell your unpaidinvoices to a company at a
discount to get cash faster.
Speaker 1 (11:38):
Again serves a purpose, but you need to
understand the costs.
Wow Okay, so lots of options.
It really underlines thatleverage can be a superpower,
but like any superpower, you'vegot to handle it responsibly,
right?
What's the danger zone?
What's the kryptonite here?
Speaker 2 (11:47):
Over leverage.
That's the big one Taking ontoo much debt, especially
relative to your equity or yourability to generate cash flow.
Speaker 1 (11:55):
What happens then?
Speaker 2 (11:56):
Well, it puts a huge strain on your balance sheet,
makes it harder to borrow moreif you need to, or to invest in
new opportunities.
Those fixed loan payments, theydon't care if you had a slow
month.
You opportunities those fixedloan payments, they don't care
if you had a slow month, youhave to make them which can
crush your cash flow if salesdip unexpectedly.
Yeah, that sounds stressful, itis, and in a worst case scenario
(12:16):
, especially for smallerbusinesses without deep pockets,
you could risk losing control,defaulting, maybe even losing
assets you pledged as collateral.
And don't forget if youborrowed against an asset, say
equipment, that asset coulddepreciate, making the situation
worse.
Speaker 1 (12:29):
OK, so managing this wisely is paramount.
The sources really hammered on.
Roi analysis, return oninvestment yeah, how vital is
that before you even take out aloan.
Speaker 2 (12:39):
It's absolutely critical.
Roi shouldn't be anafterthought.
It should be part of thedecision making process.
Before you borrow, it's yourfinancial justification for
taking on the debt.
Speaker 1 (12:48):
And the formula is Help me remember.
Speaker 2 (12:51):
Pretty simple.
You take the net profit youexpect from the investment the
loan is funding.
Subtract the total cost of thatinvestment, which includes the
loan principal, all the interest, any fees, then divide that
result by the cost of theinvestment.
Multiply by 100 to get yourpercentage ROI.
Speaker 1 (13:07):
Why is going through that exercise so important?
Speaker 2 (13:08):
Several reasons.
One, it forces you to thinkclearly about how this loan will
actually make you money,preventing you from borrowing
for things that won't generate areturn.
Two, it helps you comparedifferent opportunities.
Which investment gives the bestbang for the buck?
Speaker 1 (13:23):
Right Prioritization Exactly.
Speaker 2 (13:26):
And three.
Walking into a lender's officewith a well-thought-out ROI
projection shows you've doneyour homework.
It builds confidence andseriously improves your chances
of getting approved.
Speaker 1 (13:36):
So we need to track things like potential revenue
growth from the investment, anycost savings it might create,
impact on profit margins andpayback period how long until
the investment pays for itself.
Speaker 2 (13:46):
Yes, payback period is huge.
How quickly will the cash flowgenerated by this investment
cover the initial loan amount?
Shorter is generally better,less risk, faster path to actual
profit.
Speaker 1 (13:56):
Okay, so, beyond the initial ROI calculation, what
are the key strategies formanaging the debt once you have
it?
Speaker 2 (14:03):
First, stick to the plan.
That loan was approved for aspecific purpose tied to your
business plan and those ROIprojections.
Don't let the funds leak intonon-essential expenses.
Use that initial use of fundsoutline as your guide.
Speaker 1 (14:17):
Keep it focused.
Speaker 2 (14:18):
Absolutely.
Second, and this one's reallyimportant, but often overlooked
regularly compare your actualresults to your financial
forecast, Like every singlemonth You're adjusting to
actuals, right?
Exactly See how your salescosts and profits are tracking
against what you predicted whenyou took out the loan.
There is a great analogy from aCEO, Peter Gregory, in our
(14:39):
sources.
Speaker 1 (14:39):
Oh yeah.
Speaker 2 (14:40):
He said tracking your financials is like cleaning the
shower If you do it often, it'sno big deal.
Wait a year to do it and you'regoing to have to hire a
contractor to come rip out yourshower.
Speaker 1 (14:49):
Huh, that's vivid, but it makes sense.
Catch deviations early.
Speaker 2 (14:53):
Precisely If sales are lower than expected.
You see it early and can adjustspending or strategy before you
run into a cash flow crisis.
If they're high or great, maybeyou can pay down debt faster or
reinvest.
Speaker 1 (15:04):
What else Monitor cash runway?
Speaker 2 (15:06):
Definitely Know your burn rate, how quickly you're
spending cash and project howlong your current funds will
last.
You need milestones for whenthe investment needs to start
generating positive cash flow.
Also, keep your financialstatements up to date, not just
for taxes, but for internalmanagement and future lenders.
They want to see currentperformance and realistic
projections.
Speaker 1 (15:27):
And managing your credit score is obviously key.
Speaker 2 (15:29):
Both business and personal, Often Pay everything
on time.
Even being a few days late on abusiness loan or credit card
can get reported and ding yourscore.
And a really crucial point ifthe current funding isn't
working, if it's not driving theexpected growth, don't just
jump into more debt.
Speaker 1 (15:46):
Right Pause and reassess.
Speaker 2 (15:48):
Focus on cutting costs, improving efficiency,
figuring out why the plan isn'tworking before you dig a deeper
hole by adding more leverage.
Speaker 1 (15:55):
And finally talk to people.
Speaker 2 (15:58):
Yes, don't try to figure all this out alone.
Talk to your banker, youraccountant, a financial advisor,
before making any big borrowingdecisions.
Get expert input tailored toyour specific situation.
It's almost always worth it.
Speaker 1 (16:09):
This has been incredibly clarifying.
So financial leverage, it's notthe monster under the bed.
When you understand it, whenyou manage it strategically, it
really isn't just debt.
Speaker 2 (16:19):
It's a tool, A powerful tool yeah, an enabler
for growth, acquiring assets,expanding your operations,
boosting your profitability.
It can help with all of that.
Speaker 1 (16:29):
The key seemed to be clarity on your goals, tracking
performance relentlessly andpicking the right type of
financing for the job.
Do that, and the loan reallycan pay off.
Speaker 2 (16:40):
Absolutely.
It transforms from a potentialburden into a strategic growth
engine.
Speaker 1 (16:44):
Okay.
So if this conversation has gotyou thinking, maybe wondering
what kind of strategic fundingyour business might actually
qualify for, well, there's aquick way to get an idea.
If you're ready to see exactlywhat your business qualifies for
, with no hard credit pull, noupfront fees and absolutely no
pressure, just go tohttpsbitemealendixpreapproval.
Speaker 2 (17:03):
That sounds like a useful first step.
Speaker 1 (17:05):
Yeah, they say it takes about 60 seconds.
It could genuinely open youreyes to possibilities, maybe
change everything.
So that's httpsbeatemail Linuxpre-approval.
Speaker 2 (17:13):
You know it's interesting, A lot of new
entrepreneurs they get thatinitial startup funding and they
think, okay, that's it, I'mfunded.
Speaker 1 (17:20):
Right.
Speaker 2 (17:20):
One and done.
But, as we've really dug intotoday, funding isn't usually a
one-time event.
It's often cyclical, it's partof the ongoing growth process.
So maybe the real superpower offinancial leverage isn't just
getting it.
Maybe it's how well youdemonstrate you can use it
effectively, because provingthat that opens the door to even
(17:41):
bigger opportunities down theroad makes you wonder, doesn't
it, what new opportunity couldmanaging leverage well unlock
for your business.
Next,
So have you ever been there?
You're running your smallbusiness.
You've got these amazing ideas,big plans for growth, right,
but the bank account it feelslike it's always just stretched
a bit too thin.
Speaker 2 (00:13):
Yeah, that's a feeling a lot of business owners
know well.
It's almost universal.
Speaker 1 (00:17):
Exactly Right.
But what if I told you the keyisn't just having more money,
but maybe using capital in asmarter way?
There's this tool financialleverage.
Leverage that often gets a badrap.
Speaker 2 (00:28):
People just think debt that's a really critical
point to start with.
Today we are doing a deep diveinto financial leverage and yeah
, if that word leverage justmakes you think of, you know,
scary loans and risk, let's tryand shift that perspective,
because this isn't about justborrowing money recklessly.
It's about understanding howsmart, strategic borrowing can
(00:48):
actually become a kind ofsuperpower for your business.
Speaker 1 (00:51):
A superpower.
I like that.
Speaker 2 (00:52):
Yeah, amplifying returns, speeding up growth in
ways maybe you haven't evenconsidered.
Speaker 1 (00:56):
All right.
So our mission today, in thisdeep dive, is really to give you
, the business owner listening,a kind of roadmap.
How do you turn those feelingsof limitation into well, real
growth?
Speaker 2 (01:08):
We're going to unpack what financial leverage
actually is.
Look at how you canstrategically apply it, figure
out how to manage it withoutgetting into trouble, and help
you see when and how it fitsyour specific business goals.
Speaker 1 (01:21):
Think of this as maybe a shortcut right, Getting
you the essential info onexpanding your business without
feeling totally overwhelmed byfinancial jargon.
You should feel empowered afterthis.
Speaker 2 (01:30):
Okay, let's dive in then.
What is financial leverageFundamentally?
Forget the scary connotationsfor a second.
Think of it more like a leverand a fulcrum in physics.
At its core, it's usingborrowed money yeah, that's the
debt part but using it toincrease the potential return on
your own money, your owninvestment.
It's about making your capitalwork harder for you.
Speaker 1 (01:52):
Right.
So it's not just debt as aburden, it's debt as a tool to
amplify what you already have.
Speaker 2 (01:58):
Precisely.
It ties right into that oldsaying you know you have to
spend money to make money.
Speaker 1 (02:03):
Leverage lets you do that, saying you know you have
to spend money to make money.
Leverage lets you do that.
It lets you invest in those biggrowth moves, maybe expanding
your space, buying anothercompany, getting new tech
without and this is key withoutdraining all your cash reserves.
Speaker 2 (02:16):
That's a huge point and unlike, say, getting equity
investors, where you're sellingoff parts of your company.
Speaker 1 (02:23):
Right With debt financing.
You keep full ownership, youkeep control, Plus there's a
nice little bonus.
People often miss the interestyou pay on that debt.
It's usually tax deductible.
Speaker 2 (02:32):
Oh, interesting.
So that actually lowers thereal cost of borrowing.
Speaker 1 (02:35):
Exactly.
It gives debt a financial edgethat equity financing doesn't
have in that specific way.
Speaker 2 (02:41):
And you mentioned predictability earlier Having a
set repayment schedule that canactually make managing cash flow
clearer.
Maybe it can, yeah.
Speaker 1 (02:49):
It forces a certain discipline.
But OK, if we're using debtstrategically, how do we measure
if we're doing it right?
How much is too much?
Is there a metric?
Speaker 2 (02:58):
Yeah, how do we gauge that?
Speaker 1 (02:59):
There is and it's a really important one the
financial leverage ratio.
You might also hear it calledthe debt to equity ratio.
Speaker 2 (03:05):
Debt to equity.
It sounds fancy, but thecalculation is pretty
straightforward.
You just take your total debteverything you owe and divide it
by your shareholder's equity,the owner's stake in the company
Got it.
Our sources mentioned ahypothetical company, scrifty.
Let's say they had $110,000 intotal debt, like accounts,
payable loans etc.
And they had $200,000 inowner's equity.
Speaker 1 (03:28):
Okay, so $110,000 divided by $200,000.
Speaker 2 (03:31):
Comes out to $0.55.
Speaker 1 (03:32):
Right, and what does that $0.55 tell us?
Is that good, bad?
Speaker 2 (03:35):
That's generally considered pretty good, Really
solid actually.
It tells lenders, investors,anyone looking at the books,
that Scrifty is using debt butthey're not overly reliant on it
.
There's more equity backing thebusiness than debt.
Speaker 1 (03:47):
So less than one is the target zone.
Speaker 2 (03:48):
Yeah, generally speaking, a ratio under one is
seen as healthy.
Once you get above one, itmeans you have more debt than
equity and the business startslooking riskier to outsiders.
So keeping it below one, likeScrifty's 0.55, definitely helps
when you need more fundinglater.
Speaker 1 (04:03):
Okay, that makes sense.
So leverage can be powerful.
The ratio helps us measure it.
Now let's get really practicalFor the small business owner
listening when does taking ondebt stop being, you know, just
a scary thought and become asmart, strategic move?
Speaker 2 (04:18):
Right.
When is it necessary?
Often, it boils down to a fewkey situations where debt really
acts like fuel for the fire.
A super common one is bridgingworking capital gaps.
Speaker 1 (04:30):
Okay, like what?
Speaker 2 (04:31):
Well, imagine you land a huge new client Awesome
right.
But maybe you need to buy a tonof inventory up front or hire
temporary staff and you won'tget paid by the client for, say,
60 or 90 days.
Speaker 1 (04:44):
Ah, the classic cash flow crunch.
Speaker 2 (04:45):
Exactly.
A working capital line ofcredit is perfect for that.
It bridges that gap so you canpay your suppliers, make payroll
and keep things runningsmoothly until the client's
payment comes in.
Speaker 1 (04:55):
That makes sense.
What about bigger picture stufflike actual expansion?
Is it always about like buyinga bigger building?
Speaker 2 (05:01):
Not necessarily, though that's definitely one use
case.
Expansion can mean lots ofthings.
It could be investing in new,more efficient equipment, maybe
automating part of your processRight.
It could be acquiring acompetitor or a complementary
business, or even investing in abig software upgrade like an
ERP system to manage everythingbetter.
Those things often requiresignificant capital up front.
Speaker 1 (05:23):
And maybe buying out a partner.
Speaker 2 (05:24):
That too.
Funding a business transitionlike a partial owner buyout
often needs external financing.
Speaker 1 (05:30):
Let's make this real.
Our sources had a great exampleSally the dentist.
Speaker 2 (05:34):
Ah yes, Sally's story is a perfect illustration.
She had a small 2,000 squarefoot office and she was totally
outgrowing it.
She needed to expand.
Speaker 1 (05:42):
And she had options right.
Speaker 2 (05:43):
Two main paths.
Option A use $200,000 of herown cash to buy a 5,000 square
foot office.
The projections showed thatwould likely generate about
$20,000 in profit.
Speaker 1 (05:56):
Pretty straightforward, okay.
What was option B?
Speaker 2 (05:58):
Option B was the leveraged approach.
She used only $100,000 of herown cash, then borrowed $600,000
from the bank, let's say at 5%interest, to buy a much larger,
10,000 square foot office.
Speaker 1 (06:10):
Wow, much bigger leap .
How did that turn out?
Speaker 2 (06:12):
Well, that bigger space allowed for more chairs,
more services, maybe bringing inspecialists, and it resulted in
a $40,000 profit for Sally$40,000.
Speaker 1 (06:20):
So double the profit of option A.
Speaker 2 (06:21):
Exactly.
But here's the kicker.
Think about her return on herinvestment.
In option A, she invested $200Kand got $20K profit.
That's a 10% return.
In option B, she only invested$100 of her own money and got
$40K profit.
That's a 40% return on her cash.
Speaker 1 (06:39):
That's huge.
The leverage totally amplifiedher return.
Speaker 2 (06:43):
Massively.
It shows how even borrowingamounts like $50K, $100 or even
more, when used smartly, cangenerate much higher returns
than just using your own limitedcash.
Speaker 1 (06:53):
Any other quick examples?
Speaker 2 (06:54):
Yeah, there was one about a small manufacturer.
They made high-end weddingbands using get this meteorite
fragments Very niche, veryexpensive material.
Speaker 1 (07:02):
Oh, okay.
Speaker 2 (07:03):
They took out a loan, maybe in that $50K $100K range,
to buy a new precision cutter.
This thing dramatically reducedmaterial waste, paid for itself
in under a year, basicallydoubled the amount of usable
meteorite they got from eachpiece.
Huge boost to their productmargins.
Speaker 1 (07:18):
So that's using debt for efficiency gains, which
leads to profit.
Speaker 2 (07:21):
Exactly, and it's not just physical stuff.
Another company used debt todouble their marketing budget.
They ran these pre-roll videoads.
Speaker 1 (07:30):
OK, Risky maybe.
Speaker 2 (07:32):
Well, they tracked it carefully and for every $1 they
spent on those ads, theygenerated $3 in return, expanded
their brand, got more customers.
That's using debt directly forrevenue generation.
Speaker 1 (07:43):
So it really is versatile.
Retailers using it forinventory, restaurants for new
locations or kitchens servicebusinesses, maybe hiring more
people.
Speaker 2 (07:51):
Precisely Manufacturers buying property to
build equity and control costs.
Each industry finds ways to useleverage strategically.
Speaker 1 (08:00):
Okay.
So if you're convinced thatstrategic debt might be right,
you quickly realize debt isn'tjust one thing.
There are all these differenttypes of financing out there.
How do you choose the right one?
Speaker 2 (08:11):
That's a great question, because using the
wrong tool can cause problems.
It really depends on what youneed the money for and how you
need to access it.
Speaker 1 (08:18):
So what are some common tools?
Speaker 2 (08:19):
Well, for ongoing flexibility, day-to-day stuff, a
business line of credit isoften a go-to.
Think of it like a credit cardfor your business, but usually
with a higher limit and maybebetter REITs.
Speaker 1 (08:29):
Revolving right, you draw pay back, draw again.
Speaker 2 (08:36):
Exactly.
It's ideal for managing thosecash flow ups and downs.
We talked about handlingseasonal peaks, like buying
extra inventory before theholidays or just having a safety
net for unexpected costs.
And the big plus you only payinterest on the amount you've
actually drawn down, not thewhole credit line.
Speaker 1 (08:51):
MARK MIRCHANDANI, that flexibility seems really
useful, but what about thosebigger one-off investments like
Sally buying the building or themanufacturer buying the cutter?
Speaker 2 (09:00):
SARAH BALDWIN.
For those kinds of large,specific purchases with a longer
lifespan, a business term loanis more typical.
You get a lump sum of cash upfront and you pay it back in
regular installments over a setperiod could be a few years,
could be longer for real estate.
Speaker 1 (09:13):
So more structured, predictable payments.
Speaker 2 (09:15):
Right, Better suited for financing assets like major
equipment, property or evenbuying another business.
It has a clear start and enddate for repayment.
Speaker 1 (09:23):
What about smaller needs, like maybe just a few
thousand dollars?
Speaker 2 (09:27):
Business credit cards can fill that gap, especially
for needs under, say, $5,000.
They can be easier to qualifyfor, especially for newer
businesses, and using themresponsibly is a great way to
start building your businesscredit history.
Many card issuers report to thebusiness credit bureaus.
Speaker 1 (09:44):
Okay, and then there are SBA loans.
We hear about those a lot.
Small business administration.
Speaker 2 (09:49):
Yes, sba loans are a huge resource.
They aren't direct loans fromthe government, but the SBA
guarantees a portion of the loanmade by a partner lender, like
a bank.
Speaker 1 (09:59):
Which makes the bank more willing to lend.
Speaker 2 (10:01):
Exactly.
It reduces the bank's risk, sothey're often available to
businesses that might not quitequalify for a conventional bank
loan.
They often come with benefitslike longer repayment terms and
sometimes lower down payments.
Speaker 1 (10:12):
Are there different kinds?
Speaker 2 (10:13):
Oh yeah, there are several programs.
Two common ones are SBA ExpressLoans, which go up to $350,000
and are often used for workingcapital or expansion, and are
often used for working capitalor expansion, and the flagship
SBA 7A loan program, which cango up to $5 million for bigger
things like major acquisitions,startup costs or buying
commercial real estate.
Speaker 1 (10:37):
Gotcha.
Speaker 2 (10:38):
I also saw net 30 accounts mentioned.
That sounds different.
It is.
Yeah, it's actually a form oftrade credit, not a loan in the
traditional sense.
It's basically getting termsfrom your suppliers.
Speaker 1 (10:44):
Like buy now, pay in 30 days.
Speaker 2 (10:46):
Exactly.
You get supplies or inventoryand the vendor gives you 30 days
, or sometimes 60 or 90, to paythe invoice.
If that vendor reports yourpayment history to the business
credit bureaus and many do it'sa fantastic, often easy way to
start building your businesscredit profile, establishing
those trade lines lenders lookfor.
Often they don't even checkyour personal credit.
Speaker 1 (11:07):
Simple but effective.
Any others worth a quickmention.
Speaker 2 (11:09):
Well, you sometimes hear about merchant cash
advances or MCAs.
These aren't loans either.
They're an advance based onyour future credit card sales.
Repayment is typically apercentage of daily sales.
Can be quick funding, but oftenvery expensive.
Speaker 1 (11:23):
Okay, good to know.
Speaker 2 (11:24):
And invoice financing or factoring, where you
essentially sell your unpaidinvoices to a company at a
discount to get cash faster.
Speaker 1 (11:38):
Again serves a purpose, but you need to
understand the costs.
Wow Okay, so lots of options.
It really underlines thatleverage can be a superpower,
but like any superpower, you'vegot to handle it responsibly,
right?
What's the danger zone?
What's the kryptonite here?
Speaker 2 (11:47):
Over leverage.
That's the big one Taking ontoo much debt, especially
relative to your equity or yourability to generate cash flow.
Speaker 1 (11:55):
What happens then?
Speaker 2 (11:56):
Well, it puts a huge strain on your balance sheet,
makes it harder to borrow moreif you need to, or to invest in
new opportunities.
Those fixed loan payments, theydon't care if you had a slow
month.
You opportunities those fixedloan payments, they don't care
if you had a slow month, youhave to make them which can
crush your cash flow if salesdip unexpectedly.
Yeah, that sounds stressful, itis, and in a worst case scenario
(12:16):
, especially for smallerbusinesses without deep pockets,
you could risk losing control,defaulting, maybe even losing
assets you pledged as collateral.
And don't forget if youborrowed against an asset, say
equipment, that asset coulddepreciate, making the situation
worse.
Speaker 1 (12:29):
OK, so managing this wisely is paramount.
The sources really hammered on.
Roi analysis, return oninvestment yeah, how vital is
that before you even take out aloan.
Speaker 2 (12:39):
It's absolutely critical.
Roi shouldn't be anafterthought.
It should be part of thedecision making process.
Before you borrow, it's yourfinancial justification for
taking on the debt.
Speaker 1 (12:48):
And the formula is Help me remember.
Speaker 2 (12:51):
Pretty simple.
You take the net profit youexpect from the investment the
loan is funding.
Subtract the total cost of thatinvestment, which includes the
loan principal, all the interest, any fees, then divide that
result by the cost of theinvestment.
Multiply by 100 to get yourpercentage ROI.
Speaker 1 (13:07):
Why is going through that exercise so important?
Speaker 2 (13:08):
Several reasons.
One, it forces you to thinkclearly about how this loan will
actually make you money,preventing you from borrowing
for things that won't generate areturn.
Two, it helps you comparedifferent opportunities.
Which investment gives the bestbang for the buck?
Speaker 1 (13:23):
Right Prioritization Exactly.
Speaker 2 (13:26):
And three.
Walking into a lender's officewith a well-thought-out ROI
projection shows you've doneyour homework.
It builds confidence andseriously improves your chances
of getting approved.
Speaker 1 (13:36):
So we need to track things like potential revenue
growth from the investment, anycost savings it might create,
impact on profit margins andpayback period how long until
the investment pays for itself.
Speaker 2 (13:46):
Yes, payback period is huge.
How quickly will the cash flowgenerated by this investment
cover the initial loan amount?
Shorter is generally better,less risk, faster path to actual
profit.
Speaker 1 (13:56):
Okay, so, beyond the initial ROI calculation, what
are the key strategies formanaging the debt once you have
it?
Speaker 2 (14:03):
First, stick to the plan.
That loan was approved for aspecific purpose tied to your
business plan and those ROIprojections.
Don't let the funds leak intonon-essential expenses.
Use that initial use of fundsoutline as your guide.
Speaker 1 (14:17):
Keep it focused.
Speaker 2 (14:18):
Absolutely.
Second, and this one's reallyimportant, but often overlooked
regularly compare your actualresults to your financial
forecast, Like every singlemonth You're adjusting to
actuals, right?
Exactly See how your salescosts and profits are tracking
against what you predicted whenyou took out the loan.
There is a great analogy from aCEO, Peter Gregory, in our
(14:39):
sources.
Speaker 1 (14:39):
Oh yeah.
Speaker 2 (14:40):
He said tracking your financials is like cleaning the
shower If you do it often, it'sno big deal.
Wait a year to do it and you'regoing to have to hire a
contractor to come rip out yourshower.
Speaker 1 (14:49):
Huh, that's vivid, but it makes sense.
Catch deviations early.
Speaker 2 (14:53):
Precisely If sales are lower than expected.
You see it early and can adjustspending or strategy before you
run into a cash flow crisis.
If they're high or great, maybeyou can pay down debt faster or
reinvest.
Speaker 1 (15:04):
What else Monitor cash runway?
Speaker 2 (15:06):
Definitely Know your burn rate, how quickly you're
spending cash and project howlong your current funds will
last.
You need milestones for whenthe investment needs to start
generating positive cash flow.
Also, keep your financialstatements up to date, not just
for taxes, but for internalmanagement and future lenders.
They want to see currentperformance and realistic
projections.
Speaker 1 (15:27):
And managing your credit score is obviously key.
Speaker 2 (15:29):
Both business and personal, Often Pay everything
on time.
Even being a few days late on abusiness loan or credit card
can get reported and ding yourscore.
And a really crucial point ifthe current funding isn't
working, if it's not driving theexpected growth, don't just
jump into more debt.
Speaker 1 (15:46):
Right Pause and reassess.
Speaker 2 (15:48):
Focus on cutting costs, improving efficiency,
figuring out why the plan isn'tworking before you dig a deeper
hole by adding more leverage.
Speaker 1 (15:55):
And finally talk to people.
Speaker 2 (15:58):
Yes, don't try to figure all this out alone.
Talk to your banker, youraccountant, a financial advisor,
before making any big borrowingdecisions.
Get expert input tailored toyour specific situation.
It's almost always worth it.
Speaker 1 (16:09):
This has been incredibly clarifying.
So financial leverage, it's notthe monster under the bed.
When you understand it, whenyou manage it strategically, it
really isn't just debt.
Speaker 2 (16:19):
It's a tool, A powerful tool yeah, an enabler
for growth, acquiring assets,expanding your operations,
boosting your profitability.
It can help with all of that.
Speaker 1 (16:29):
The key seemed to be clarity on your goals, tracking
performance relentlessly andpicking the right type of
financing for the job.
Do that, and the loan reallycan pay off.
Speaker 2 (16:40):
Absolutely.
It transforms from a potentialburden into a strategic growth
engine.
Speaker 1 (16:44):
Okay.
So if this conversation has gotyou thinking, maybe wondering
what kind of strategic fundingyour business might actually
qualify for, well, there's aquick way to get an idea.
If you're ready to see exactlywhat your business qualifies for
, with no hard credit pull, noupfront fees and absolutely no
pressure, just go tohttpsbitemealendixpreapproval.
Speaker 2 (17:03):
That sounds like a useful first step.
Speaker 1 (17:05):
Yeah, they say it takes about 60 seconds.
It could genuinely open youreyes to possibilities, maybe
change everything.
So that's httpsbeatemail Linuxpre-approval.
Speaker 2 (17:13):
You know it's interesting, A lot of new
entrepreneurs they get thatinitial startup funding and they
think, okay, that's it, I'mfunded.
Speaker 1 (17:20):
Right.
Speaker 2 (17:20):
One and done.
But, as we've really dug intotoday, funding isn't usually a
one-time event.
It's often cyclical, it's partof the ongoing growth process.
So maybe the real superpower offinancial leverage isn't just
getting it.
Maybe it's how well youdemonstrate you can use it
effectively, because provingthat that opens the door to even
(17:41):
bigger opportunities down theroad makes you wonder, doesn't
it, what new opportunity couldmanaging leverage well unlock
for your business.
Next,
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Special Summer Offer: Exclusively on Apple Podcasts, try our Dateline Premium subscription completely free for one month! With Dateline Premium, you get every episode ad-free plus exclusive bonus content.