- November 27, 2020
- Posted by: saenicsa
- Category: Finance & accounting, Funding trends
Sometimes financing is one of the biggest problems with an investment, but why is that?
Well, an investment carries certain risks, these risks very from one project to another and whether using your personal money or a lender’s money those risks will be the same. The difference is that when using financing you can obtain a considerable amount of funds that then permits you to grow and expand your business at an accelerated pace than you would with your own personal capital.
But there is another reason, and it follows the premise mentioned in the previous paragraph, so continue reading below to find out…
Why is it beneficial to borrow capital when investing?
It is beneficial to borrow capital instead of using your own capital when investing because this allows you to increase gains. How?
Well let’s say that you have $10,000 of your own money and you borrow $100,000 from a lender at an interest rate of 7.5%.
Your financial plan that you prepared already has budgeted down to the last cent how the $110,000 will be spent. Thanks to this plan and your historic records you project that with this additional capital you will be able to increase the value of your total investment by 20%.
What does this mean? Well it means that by the end of the year after paying back the amount of the loan and yourself for the money you put into the business your profit would be $14,500. That a 145% return, not too bad.
So, in other words when using borrowed capital there is a possibility that a considerable return can be made that is much greater than just using your own personal funds.
Keep in mind a few things before using borrowed capital
But – wait! It is important to keep in mind a few things before beginning to solicit loans for investments in a new business venture. For example:
- Just as incredible profits are possible, so are incredible losses;
- We cannot underscore enough the importance of a solid financial plan;
- There needs to be a certain about of assurance that the estimated percentage of growth will not only repay the original amount of the loan; but…
- The cost of financing needs to be inferior than the expected rate of return on the investment total.
So, even though it is possible to have very enticing profits when using borrowed funds, there are also very considerable risks that come with it and the responsibility to understand and properly project the growth of your business into the future.