How to leverage your money
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- Category: SME toolkit
- Written by Bridget Olotu
- Hits: 3861
Financial education teaches that money-making is not entirely a product of sweat or tears. It is not entirely a product of how much you have in your pockets but it is really a product of financial intelligence. It is your ability to harness the mental resources you have to bear on your financial objectives thus creating or providing for the physical resources you don’t have and at the end of the day creating surplus for yourself.
In an inflationary economy such as this with deepening economic crisis, without leverage, most workers cannot put enough money aside for their future because the more money they save, the less valuable it becomes. Leveraging makes your money work harder for you by using other people’s money. But you know, like I shared with us in one of the articles on debt, debt financing is actually one way business people or individuals can improve their financial situation. But one advice from my mentor: never borrow to buy an asset you don’t have control over.
The reason the recent stock market crash in Nigeria affected a large proportion of the investing public in the country apart from the fact that investing in stocks is better for the long haul, is because people are investing in assets they do not have control over. We are made to believe that the market determines the price of stocks, but in reality and in some cases, there are undercurrents and intrigues to the whole stock market investment. What do you say of a situation where quoted companies buy back their stock, thus creating scarcity for such a stock and an increase in demand for the stock, thereby leading to an increase in price of the stock?
If an investor therefore lacks the financial intelligence to control an investment, the use of leverage becomes risky and even suicidal. This is the major flaw with paper assets such as savings, stocks, bonds, mutual funds and index funds, where the investor lacks control. And because you lack control, it is difficult and risky to apply leverage. Like Robert admits, using leverage to invest in something you do not control would be like buying a car without a steering wheel and then stomping on the accelerator.
Most people that were hurt during the recent stock market meltdown in Nigeria thought their investments in stocks would keep going up and up. Many borrowed thousands and millions to acquire more stocks in the hope of selling at a higher price and making some capital gain from it, while some even borrowed using their existing portfolio as collateral. Since they had no control over the investment, they were at the mercy of the market. When the market came tumbling, their investments came tumbling too. Their investments (and calculated net worth) melted like butter in the sun.
What is leverage? In simple terms, leverage is doing more with less. I will be looking at this from the following perspectives.
1.Leverage could mean Other People’s Money (OPM).
My advice is, if you have to borrow, or use bank’s money to carry out your project, you need to mind two things: (a) you need to have control over the business or project. (b) you need to have done your due diligence on the project before asking for any form of financing. My company prepared a business plan for some Nigerians who live in the US and wanted to expand their already established business operations in Nigeria.
The share capital of my clients was small compared to the amount they wanted to borrow from the bank. They eventually applied for a joint venture arrangement between them and the bank. The bank bought into the business idea worth half a billion naira. Since they couldn’t raise the money through loan, they worked out a JV with the bank. So you can leverage with OPM when you are sure you have a control of the business and have done your due diligence.
2. Leverage could mean Other People’s Knowledge and Skill (OPKS).
When Microsoft, now the world’s leading software manufacturer started business, Bill Gates and his partner Paul Allen were just techies. They lacked managerial skills and competence needed to manoeuvre the business. They had to invite Steve Ballmer, a Harvard MBA product and Microsoft’s current CEO, to come on board to steer the management of the company while they focused on what they could do best, write software programmes.
Steve Ballmer’s inclusion on board changed and skyrocketed the fame and fortunes of the company. They couldn’t pay him at the time; so they settled for stock options with him. Ballmer’s shareholding in Microsoft today makes him a multi-billionaire. Leverage may come to you as the knowledge, skills or abilities (KSA) that somebody can contribute to your business or project.
I am working on a massive project today and I am leveraging the knowledge and skills of some very successful Nigerians in their various fields to carry out the project. I cannot pay them initially now, but we have worked something out. You can also do the same.
3. Leverage could mean Other People’s Credibility (OPC).
There are few Nigerians whose uncommon and very successful achievements have made them the toast of board selections in many blue-chip companies in the country. Chief Gamaliel Onosode, Dr. Christopher Kolade and Professor Pat Utomi, Alhaji Aliko Dangote, inter alia, are among this rare class of Nigerians. Imagine floating a business and getting one of these men on board as chairman, the Nigerian corporate environment will respond positively to your business.
So you can leverage people’s credibility to build a strong business, get a loan, get support for your project, etc. But you have to make sure you don’t tarnish the image and reputation of such people which they’ve built over the years.
4. Leverage could mean Other People’s Assets (OPA).
Sometimes, people have started businesses by leveraging on the assets provided by certain individuals to them. I know a business that the first car the company had was provided by a shareholder as his own contribution to the business. Another individual provided a completed building as his own contribution to a group of people who were starting a microfinance bank.
5. Leverage could also mean Other People’s Contacts or Network (OPCN).
In this case, somebody might provide you contacts that can help you secure a contract, implement a project or get financing for a project. This also could be a form of leveraging.
In other words, leveraging does not only connote money. It could also involve or require some other intangible but very important assets. As a business person, you may not need money for a project, all you may require is someone’s credibility, contacts or knowledge to achieve your laid-down objectives. When you identify the form of leverage you need, then identify those who can likely provide it and find out what you might need to provide to secure that leverage. By leveraging, you can actually do much more with the few resources you have.
Articles
How to leverage your money
Category: SME toolkit Written by Bridget Olotu Hits: 3861
Financial education teaches that money-making is not entirely a product of sweat or tears. It is not entirely a product of how much you have in your pockets but it is really a product of financial intelligence. It is your ability to harness the mental resources you have to bear on your financial objectives thus creating or providing for the physical resources you don’t have and at the end of the day creating surplus for yourself.
In an inflationary economy such as this with deepening economic crisis, without leverage, most workers cannot put enough money aside for their future because the more money they save, the less valuable it becomes. Leveraging makes your money work harder for you by using other people’s money. But you know, like I shared with us in one of the articles on debt, debt financing is actually one way business people or individuals can improve their financial situation. But one advice from my mentor: never borrow to buy an asset you don’t have control over.
The reason the recent stock market crash in Nigeria affected a large proportion of the investing public in the country apart from the fact that investing in stocks is better for the long haul, is because people are investing in assets they do not have control over. We are made to believe that the market determines the price of stocks, but in reality and in some cases, there are undercurrents and intrigues to the whole stock market investment. What do you say of a situation where quoted companies buy back their stock, thus creating scarcity for such a stock and an increase in demand for the stock, thereby leading to an increase in price of the stock?
If an investor therefore lacks the financial intelligence to control an investment, the use of leverage becomes risky and even suicidal. This is the major flaw with paper assets such as savings, stocks, bonds, mutual funds and index funds, where the investor lacks control. And because you lack control, it is difficult and risky to apply leverage. Like Robert admits, using leverage to invest in something you do not control would be like buying a car without a steering wheel and then stomping on the accelerator.
Most people that were hurt during the recent stock market meltdown in Nigeria thought their investments in stocks would keep going up and up. Many borrowed thousands and millions to acquire more stocks in the hope of selling at a higher price and making some capital gain from it, while some even borrowed using their existing portfolio as collateral. Since they had no control over the investment, they were at the mercy of the market. When the market came tumbling, their investments came tumbling too. Their investments (and calculated net worth) melted like butter in the sun.
What is leverage? In simple terms, leverage is doing more with less. I will be looking at this from the following perspectives.
1.Leverage could mean Other People’s Money (OPM).
My advice is, if you have to borrow, or use bank’s money to carry out your project, you need to mind two things: (a) you need to have control over the business or project. (b) you need to have done your due diligence on the project before asking for any form of financing. My company prepared a business plan for some Nigerians who live in the US and wanted to expand their already established business operations in Nigeria.
The share capital of my clients was small compared to the amount they wanted to borrow from the bank. They eventually applied for a joint venture arrangement between them and the bank. The bank bought into the business idea worth half a billion naira. Since they couldn’t raise the money through loan, they worked out a JV with the bank. So you can leverage with OPM when you are sure you have a control of the business and have done your due diligence.
2. Leverage could mean Other People’s Knowledge and Skill (OPKS).
When Microsoft, now the world’s leading software manufacturer started business, Bill Gates and his partner Paul Allen were just techies. They lacked managerial skills and competence needed to manoeuvre the business. They had to invite Steve Ballmer, a Harvard MBA product and Microsoft’s current CEO, to come on board to steer the management of the company while they focused on what they could do best, write software programmes.
Steve Ballmer’s inclusion on board changed and skyrocketed the fame and fortunes of the company. They couldn’t pay him at the time; so they settled for stock options with him. Ballmer’s shareholding in Microsoft today makes him a multi-billionaire. Leverage may come to you as the knowledge, skills or abilities (KSA) that somebody can contribute to your business or project.
I am working on a massive project today and I am leveraging the knowledge and skills of some very successful Nigerians in their various fields to carry out the project. I cannot pay them initially now, but we have worked something out. You can also do the same.
3. Leverage could mean Other People’s Credibility (OPC).
There are few Nigerians whose uncommon and very successful achievements have made them the toast of board selections in many blue-chip companies in the country. Chief Gamaliel Onosode, Dr. Christopher Kolade and Professor Pat Utomi, Alhaji Aliko Dangote, inter alia, are among this rare class of Nigerians. Imagine floating a business and getting one of these men on board as chairman, the Nigerian corporate environment will respond positively to your business.
So you can leverage people’s credibility to build a strong business, get a loan, get support for your project, etc. But you have to make sure you don’t tarnish the image and reputation of such people which they’ve built over the years.
4. Leverage could mean Other People’s Assets (OPA).
Sometimes, people have started businesses by leveraging on the assets provided by certain individuals to them. I know a business that the first car the company had was provided by a shareholder as his own contribution to the business. Another individual provided a completed building as his own contribution to a group of people who were starting a microfinance bank.
5. Leverage could also mean Other People’s Contacts or Network (OPCN).
In this case, somebody might provide you contacts that can help you secure a contract, implement a project or get financing for a project. This also could be a form of leveraging.
In other words, leveraging does not only connote money. It could also involve or require some other intangible but very important assets. As a business person, you may not need money for a project, all you may require is someone’s credibility, contacts or knowledge to achieve your laid-down objectives. When you identify the form of leverage you need, then identify those who can likely provide it and find out what you might need to provide to secure that leverage. By leveraging, you can actually do much more with the few resources you have.