Leverage

Money folks talk about financing in terms of the mechanical. They talk about leverage. If you borrow against the equity in your rental property in order to buy more property they’d say you are leveraging the equity. The total debt in your company might be referred to as “gearing.”

Using debt to obtain control of more assets is like a lever. It allows you to do more “financial work” with the same equity.

The problem with levers is that the work still has to be done. Force times distance. The longer the lever arm, the longer the distance travelled to the do the work. That’s good UNTIL THE LOAD ON THE OTHER SIDE OF THE FULCRUM CANNOT BE OVERCOME. When this happens your lever is turned into a catapult.

The same thing happens in your business. Leverage increases your vulnerability to market fluctuations of all kinds. As long as you can weather the market fluctuations, you think you are winning. When those vicissitudes are too great, your lever will break your teeth out. You’ll go bankrupt.

Leverage, overall, INCREASES market volatility and DECREASES business hardiness.

If you are thinking about debt, “cash flow,’ the line of credit you got to sustain your business through, and other specific instances that suited you in a downturn and think I’m wrong about this, you are stupid and I will not be able to help you.

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