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  • Writer's pictureJordan Fairbanks

What is the Right Amount of Leverage in Equity Financing?

Updated: Dec 1, 2023

Equity Financing

When it comes to running a business, the goal is to minimize the debt and increase your overall profitability. Still, many businesses look for financing options to buy equipment, build out space, or to hire individuals to expand their capacity as the business grows.

Borrowing can even be seen as a positive sign when it comes to the health and wellbeing of your business. After all, with interest expenses typically being tax deductible, debt can often be a cheaper way to increase your business assets. However, when your business is leveraged to high, then it can be a financial drag, particularly during a recession.

Another option to address your financing needs is equity financing. Here we are going to explain what it is and how to understand it in terms of the right amount of leverage.

What is Equity Financing?

Simply put, equity financing is the process of raising capital for your business through the sale of shares or ownership interest. It can span a wide range of activities and include small amounts from friends or investors to initial public offerings (IPOs).

Essentially, you have not borrowed and created debt for your business but have taken on investors or partners to fund its growth. A business could end up having multiple rounds of equity financing as it grows.

What is a Debt to Equity Ratio?

To understand if you have potentially leveraged too much equity, you have to understand what a debt to equity ratio is. Essentially, it compares the amount of the company’s debt to its stockholder equity. You are looking to use borrowed funds, either from the sale of equity in your business or debt to increase the overall rate of return on your business.

Therefore, it is important to understand how much debt you have taken on and how much equity you have sold off as it relates to the financial health and well-being of your business. For instance, you might use debt to finance assets that will eventually grow with time, thus allowing you to leverage debt to your advantage.

However, when you sell equity, those individuals are going to be interested in the type of long-term debt you take on, because it will impact their return based on their investment in your business. Therefore, understanding how your business is leveraged can help you to know when the leverage on your business is out of proportion with its revenue and profit margins.

Using Hard Money Loans to Finance Growth

Private equity can often be tapped through hard money loans. While there are specific payments involved, the funds can be focused on helping your business in all its various stages. Hard money through private equity firms also have the benefit of less paperwork and a quicker funding turnaround. These loans are often equity based, which means your credit score is not going to be a qualifying factor for your business.

Working with a partner, such as First Security Mortgage, you can have a proposal in 30 minutes or less, helping you to determine your options. Contact our experienced team today to discuss how our equity-based hard money loans could assist your business.

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