Saturday, September 15, 2012

leverage



I understand the concept of leverage.  I just think it's stupid.  Leverage is using borrowed money to make money.  Example: you borrow $100,000, and have monthly payments of $700 per month.  Now, if you can take that $100,000 in borrowed money and make more than $700 per month, then you have "leveraged" that money.  You are using borrowed money to make money.

My biggest problem with leverage is that it covers up stupid.  If someone gives the average person $100,000 for their brilliant business idea that person is going to hire 2-3 people, get an office and some furniture, and then use less than 50% of that money they borrowed to actually run the business.

A great idea is a great idea regardless of how much money you have.  Regardless of the brilliance of the idea, there are other problems.  If you don't understand accounting, finance, hiring, and firing then all that borrowed money is just going to compound your stupid and dig you into a bigger hole.  But we're taught in school is that the idea is all that matters.  That's just wrong-headed thinking. 

It seems to me like a better idea to run that business idea with whatever money you can come up with in your spare time, beyond your emergency fund.  If you have no money, then you are not going to hire anyone until you are making money.  If you don't borrow money, then you have no chance of losing money you don't have.  If I throw $70 into a business venture, then I've lost $70 and some time.  I come back knowing there is some part of my plan was a failure, and I work on that part. 

But if that business you started with the $100,000 loan fails, you still have that $700 per month payment.  You can't give up and walk away, knowing that the idea you were trying wasn't as great as you thought it was.  Because that's the real kicker.  No matter how great you think your idea is, you have to convince other people of that as well.  That's marketing.  And that's another set of books and skills you need to learn.

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