How do Small Businesses Get Money? Try "Leverage"

You may or may not have heard the term "leverage" applied to small businesses, but it's an interesting concept. If a small business uses "leverage," it means they borrow money to finance their business. But what does "business leverage" have to do with borrowing?

This is a great analogy. You know that leverage in general has to do with using a lever to lift something up. The term "leverage" also implies "advantage." So a small business gets an advantage by using leverage, lifting up its business through borrowing.

A recent study for the SBA Office of Advocacy found that size of business, age of business, and type of business were related to amount of leverage (borrowing). As you might suspect, smaller businesses and newer businesses borrowed more money than larger, older businesses.

Is leverage good or bad? It depends. More borrowing means more ability to finance growth and expansion through the purchase of assets. But if a business has too much borrowing, it may have trouble meeting its payments. One measure of leverage is a company's Debt-to-Equity ratio, determined by dividing long-term debt by the total shareholder equity. If the ratio is 1 or more, most of the assets are financed by debt. Pay attention to your company's Debt-to-Equity ratio, but don't get too worried. An example in Wikipedia showed the Debt-to-Equity ratio of General Electric as over 4. In other words, the company had four times as much debt financing as equity financing.[/p]