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Five Greatest Ideas for Financing Your Business • 47

Idea 32 - Give me but one firm spot on which to stand...

This quote from Archimedes continues, 'and I will move the world.' He is referring
to the phenomenon of leverage and claiming that with a long enough lever and
somewhere to stand he could literally reposition the world. There are two main
aspects of leverage that lend themselves to building the business of your dreams -
financial leverage and operating leverage.

Most people have at least one 'leveraged play' in their financial life. They buy a
house using a little of their own money and a lot of the building society's. If the asset
increases in value, as it always has done over the long term, then the profits gained
go only to the borrower, who only has to carry out the obligation to the building
society of paying the interest and repaying the capital. This can have an extraordi-
nary impact on your finances. Suppose you buy a house for £ 100,000 using £ 10,000
of your own money and borrowing £90,000. Twenty-five years later even if you
have not paid off the loan the asset has become worth, say, £250,000. This £160,000
is all yours giving an average return on your original £10,000 investment of £6400
or more than 60% per annum. It is almost impossible, except with a really long-
odds bet like the lottery, to do better than that. (Incidentally if a pedant says that I
should reduce the return by the cost of the loan interest I reply that you had to live
somewhere and the interest was the cost of having somewhere to live.)

The point is that you are making return on someone else's money. So it is in
business.

If you put in £10,000 and a bank puts in £90,000 to buy a business valued at
£100,000, then if you double the profits and therefore the value of the business you
get the return of £100,000 for your initial outlay of £10,000. If you have doubled
the profits in a year or two, that return is pretty good.

This is, of course, another reason for not giving ownership of the business away
in share options and so forth when the value is low. Anyway, so much for financial
leverage; now let's look at its cousin, operating leverage.