Let’s start with Financial Leverage Definition:
Financial Leverage is the use of debt (borrowed capital) results from using as a funding source when investing to expand the company’s asset base and generate returns on risk capital. Financial Leverage is an alternative investment strategy of utilizing Debt borrowed funds specifically, the use of various financial instruments to increase the potential return of an investment. Financial Leverage can also refer to the amount of debt a company uses to finance assets.
The financial leverage ratio is one of several financial measurement analyses that calculate the risk of how much capital comes in the form of debt or assesses the ability of a company to meet its financial obligations.
How Financial Leverage Works:
When purchasing assets, four main options are available to the company for financing: using equity, debt, leases, obtain IPO’s. Besides equity, the rest of the options involve costs that should be lower than the income that the company expects to earn from the asset/project.
The following is an example between two types of financial leverage
Leverage via Purchasing a Licensing SBLC
The company Purchasing a Licensing SBLC in the amount of 10M USD, the cost for one year is around 14% from the face value of the SBLC A-rated to active the credit facility normally in most banks the LTV around 85% and the interest around 4%.
Therefore, the company invests 1.4M USD for one-year leverage, to get an 8M USD line of credit, which means net credit use stand at 6.55M USD.
So the leverage ratio is 6.55/1.40= 4.67
However, to refund the debt (loan) is 8M + 0.32M (Interest 4%) = 8.32M USD.
The EBITDA at zero breaking point, the company needs to generate about 27% IRR net profits.
Leverage Debit via R.M.G Capital Group
The company deposits the 1.4M USD in IOLTA escrow NY, R.M.G Capital syndicate funds up to a leverage ratio of 5 (7M USD) according to the underwriting and analysis, risk management on the business/project funding, the interest between 3% to 15% dependents on the collateral and risk involved.
The funding program is up to 3 years.
Subject to the deposit of the funds, R.M.G provides an Insurance guarantee of 100% – Surety Bond issued from A-rated Insurance and Reinsurance companies.
Therefore, the company invests 1.4M USD for debt leverage, to get a 7M USD line of credit, which means net credit use stand at 5.6M USD.
However, to refund the debt (loan) is 5.6M + Interest, and the max period is 3 years.
The EBITDA at zero breaking point, the company needs to generate about 9% IRR net profits.
In the example above, there is a significant advantage to the R.M.G Capital leverage program.
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