What are the pro and cons of leverage for small business?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The basic pros and cons of leverage are that it can allow a small business to expand, but it can also expose the business to bankruptcy if the leverage is excessive or if it is used unwisely.

Small businesses typically do not have the capitalization needed to expand to any great degree.  If they wish to expand, they will need to borrow money, creating leverage.  This can allow them to exploit new opportunities and increase their profitability.

However, there is always the risk that the firm will not be able to repay the money that it has borrowed.  It may use the money to expand in a way that turns out not to be profitable.  In such a case, the use of leverage would end up being bad for the business.

Overall, then, leverage is something that can help a small business grow, but which must be used carefully so that it does not end up bankrupting the business.

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