Title: Advantages of Financial Leverage | Your Business
Headings: Advantages of Financial Leverage
Advantages of Financial Leverage
Increases Available Money
Shareholder Profits
Better Credit
Considerations

Content: For example, if a business produces ballpoint pens, and a new machine hits the market that can increase the efficiency of ballpoint pen manufacturing by 30 percent, it can use the free cash to purchase the machine outright. The business might also invest the money in marketing a new product or save it against future sales slumps. While borrowed money does require long-term payments, these payments are typically small and predictable. Shareholder Profits
A business that uses financial leverage can produce higher shareholder profits than businesses that only employ stock sales for financing. In businesses that only use shareholder equity, increases in business profit correspond exactly to increases in per-share stock value or dividend payments. If the profit increases 2 percent, shareholders get 2 percent more. When a business takes on a loan, the improved profitability of the business does not impact the loan payment. The difference in profitability yields higher value per share or increased dividends. If the profit increases 2 percent, shareholders of a business with financial leverage may see, for example, an increase in dividend payments of 3 percent. Better Credit
The high rate of business failure often leads lenders to be somewhat risk-averse, even for businesses that seem financially stable.