Whether a company is a start-up or in an expansion mode, funds are always a necessity. Finance powers the various processes of the company. These include increase in infrastructure and human resource, buying the inventory and machinery, and meeting the daily working capital needs.
Entrepreneurs can use equity and/or debt to fund their assets. Both the equity and the debt funding have their pros and cons. Debt financing helps to prevent or reduce the dilution of the owner’s equity. However, heavy leanings on the debt increases the company’s risk of bankruptcy.
Let’s Consider The Types Of Financial Leverage
What Is Financial Leverage?
Financial leverage refers to the amount of debt used to finance a firm’s operations. When the owner’s equity is not diluted, debt funding can positively impact the firm’s return on equity and earnings per share.
Lenders use several financial leverage ratios to ascertain a company’s financial standing. These ratios are debt/equity ratio, current ratio, and debt service coverage ratio (DSCR).
The balance sheet is an important document to judge whether the company has enough liquid assets in hand to cover the loan liability.
Types Of Financial Ratios
1.Debt To Equity Ratio
It is a financial liquidity ratio that compares a company’s total debt to total equity.
Debt/Equity Ratio = Total Liabilities/Total Equity
A lower debt to equity ratio generally indicates a more financially stable business. Lenders prefer lower debt-to-equity ratios.
It is a liquidity ratio that measures a company’s ability to pay short-term and long-term obligations.
Current Ratio = Current Assets/Current Liabilities
3.Debt Service Coverage Ratio
DSCR is also known as ‘Debt Coverage Ratio’ (DCR). This ratio gives an idea of cash availability for debt servicing towards interest, principal, and lease payments.
DSCR = Net Operating Income/Total Debt Service
Other ratios taken into consideration are:
- Acid Ratio (Quick Ratio) = (Cash and Cash Equivalents + Short-Term Investments + Accounts Receivable) ÷ Current Liabilities
- Interest Coverage Ratio = Earnings before interest and taxes (EBIT)/Interest Expense
Financial Institutions use financial statements to gauge the how financially sound a company is. Basic statements are balance sheet, income statement, and cash flow statement.
Business Loans As Leverage
The major advantage of Business Loan Bajaj is that it provides a ‘line of credit’ facility. This facility is also known as ‘flexi line’. In such a facility, the business owner gets approval for a certain limit of loan, for a said tenor.
However, the owner can tap into the funds, depending on the requirement for short and long-term goals. The business owner need not avail the whole loan. This flexi line prevents the unnecessary increase of the debt component. This reduces the company’s risk of bankruptcy.
Business loans can help finance your business-related costs, while maintaining a healthy debt/equity ratio.
Bajaj Finserv offers business loans up to Rs.30 lakh without security. The tenor can range from 12 to 96 months. It is available at nominal Business Loan Interest Rates. Unsecured business loans mean the business entity need not pledge collateral. This reduces the need for documentation. However, some documents are required to avail the Bajaj Finserv Business Loan. These are:
- KYC Documents
- Business proof (certificate of practice)
- Bank account statement of the last month
- Financial statements on the business for a certain number of years
You can get started by checking the business loan eligibility criteria. Get an idea of the payable EMI, documents required for business loan, and make a free online application.