How to Leverage Cash

Leveraging is a term for raising capital from borrowing to increase a business's capital for a potential purchase. Corporate buyouts are a form of leveraging that many companies use to expand their operations. Leveraging also takes place when an individual buys a home, hoping that the interest is lower on the mortgage than the increase in the value of the property. Cash leveraging is another form of leveraging for a new investment for a company or individual using cash, rather than credit or loans.

Instructions

1. Determine the purchase price. Whether it is another company or a piece of property, borrow enough money to afford the purchase. Aim at the highest value on the estimate, to prevent falling short of leveraging the purchase.

2. Acquire cash. The amount of cash on hand reduces the amount to finance with loans. Cash can be generated from your business, parents, friends, family and outside investors. The more cash on hand, the larger an offer you can make on a leverage purchase.

3. Make an offer. The offer should be slightly below market value. This opens negotiations with the company and allows individuals to show enough cash on hand to avoid loans and lengthy borrowing periods on both sides. People may accept a lower value of cash instead of a higher value that involves lending and additional time spent waiting.

4. Negotiate the purchase price. Emphasize the amount of cash on hand to sway the price lower. The more cash on hand, the quicker a deal can be struck between you and the seller. Ensure the seller understands that you can pay an amount in cash outright and that any additional revenues needed would be financed. The closer you are with cash in hand to their target price, the less need for financing.

5. Make the purchase. The larger the amount of the purchase price that is paid in cash, the sooner a net gain is realized in the value of the asset. Interest from financing decreases the amount of earnings from a property. The value of the cash is set at the moment of sale, while the value of the asset is expected to grow. An all-cash purchase allows you to begin seeing a return on your purchase agreement sooner without paying another company a portion of your returns.

Tips & Warnings

• Not every asset will increase in value. Any purchase carries a risk of loss, regardless of the means of purchase.

References

• Retail Investor: Leverage, What, Where and How to Measure
• Nerd Business: How to Acquire a Company Using Leverage