Hattig said:
That just seems retarded, unless you plan on grabbing the profit yourself and then claiming the company is bust and thus never paying back the loan.
It's that sort of business thinking (fiddling with numbers, debt? what debt?) that gets businesses into trouble in the first place. Only borrow if you need it to create more earning potential. i.e.,
Company A has $50. It takes $100 to invent a $foo. It borrows $50. It then sells 100 $foos, making $200. Profit: $150, Debt: $50. Repeat.
Company B has $50. It never invents a $foo, and thus never makes money, or it invents a crappy $foo_lite that loses to $foo anyway.
It might seem retarded to you, but you'd be wrong. Because it makes absolute sense. Actually, your numbers don't seem to make sense to me. I'm not sure what your example is supposed to show. I get what your trying to say, but I don't get how it applies here.
It is not fiddling with numbers. It is using leverage to maximize the returns on what money you do have. Where in my example is there fiddling? The numbers don't lie. I tried to make it as simple as possible. Its obviously more complicated than that but the principle is the same. I didn't bother including things like interest rates, short term revolving lines of credit, exotic debt vehicles, etc.
And as someone else posted, even after you pay back the money plus interest, your making a higher percentage than if you didn't borrow the money.
Obviously, adding debt increases risk. If adding debt increases your return when sales are good, it also increases your losses when sales are bad.
Using my same example:
Company A spends 100. It makes 50. Its loss is 50. Or 50%.
Company B spends 75. It borrows another 25. Total cost is 100. It makes 50. Its loss is 50. Or 66%.
This doesn't account for having to pay interest. If included, your loss is even greater.
As I said, the trick is to figure out the right balance of debt to maximize return while minimizing risk. Some people and companies can't handle the risk, so they never borrow money. Its a matter of risk tolerance.
Seriously, this is basic finance 101 stuff.
