28 May The Pros and Cons of being in debt
Risks and Benefits of debt leverage
Benefits of Leverage
Ian Joseph explains the motivation of leverage. Leverage provides the procurement of additional capital to make an investment today in order to capture a future cash flow and/ or wealth creation event in the future. The Net Present Value of total future returns has to exceed the cost of carry plus the principle of this debt commitment before the transaction can make any form of economic rationale. But the matrix is more complex than that. Leverage is marriage of accountability to the financier. Any financing breach along the journey can corrupt this tenuous relationship and potentially destroy the wealth creation matrix initially being sought. The take home message builds on this facet to ensure funding survivability.
Pitfalls of Debt
We are operating in a low interest rate environment. This can breed complacency with regards to the quantum of debt sought plus the efficiency of the rate being paid. Ian Joseph plays the “What If” game. Sensitivity analysis is crucial to understanding the viability thresholds of your business, and then knowing what the exit strategies are to unwind exposure caused by (unforeseen) adverse events. Protect yourself and protect your business is a strong mantra for Ian Joseph.
Debt vs Equity
Leverage as opposed to third party equity is a debate with multifaceted arguments. Debt ensures retainment of equity and management whereas equity creates dilution. What are the liquidity events available to exit each scenario? What are the terms and conditions inherent within each arrangement?
All interesting topics for debate with a place for both within our financial universe.