Advantages vs. Disadvantages of Leveraged Finance
- Powerful access to capital. Financial leverage multiplies the power of every dollar you put to work. If used successfully, leveraged finance can accomplish much more than you could possibly achieve without the injection of leverage.
- Ideal for acquisitions, buyouts. Because of the additional cost and risks of bulking up on debt, leveraged finance is best suited for brief periods where your business has a specific growth objective, such as conducting an acquisition, management buyout, share buyback or a one-time dividend.
- Risky form of finance. Debt is a source of funding that can help a business grow more quickly. Leveraged finance is even more powerful, but the higher-than-normal debt level can put a business into a state of leverage that is too high which magnifies exposure to risk.
- More costly. Leveraged finance products, such as leveraged loans and high yield bonds, pay higher interest rates to compensate investors for taking on more risk.
- Complex. The financial instruments involved, such as subordinated mezzanine debt, are more complex. This complexity calls for additional management time and involves various risks.
- Do you have a temporary financial need or are you facing a special situation, such as a buyout or an acquisition, in which you need an unusually large amount of money briefly?
- Are you comfortable with the increased cost, complexity and risk of this form of financing?