As a Nigerian, there’s a very high probability that you have a Whatsapp vendor on your contact list, and we know that most of them do not own a physical store and for a lot of them, their businesses are doing very well. They liaise with store owners, post their clothes on their social media, add extra prices, and sell; the store owner sells their clothes, makes a profit, win-win, and everyone’s happy.
Some even order the clothes in advance, on credit, and when they sell them, they send the agreed price to the actual owner and keep the profit. This is a simple business strategy, right? Well, I’m telling you that it is also a thing in investments but here, it is called leveraging. Leveraging is when investors borrow money to invest in additional assets, hoping that the returns on these investments will exceed the interest on the amount borrowed, giving profit to the investor after repaying the amount borrowed.
Now, leveraging has its benefits but when it is overdone, it holds so many risks. Some investors borrow too much with hopes that it would increase their returns but if it doesn’t go as expected, things could quickly go south (or north). Let’s touch on a few of those risks:
Financial Headache:
Overleveraging could make you struggle with your usual financial duties; it causes an inability to cover the cost of even your daily living as you’d be soaked and drowning in debt. So, instead of the extra cash you’d usually have around to buy your other necessities and do other business, you would have yourself counting everything kobo (and cowries) to try to stay afloat.
When this happens, it leads to reduced investor confidence and loss of business opportunities. Obviously, no one wants to commit to a business that is at risk of losing its footing and disappearing to the great beyond, this is the point where it gets lonely at the top.
Low Loan Gamble Meter
This one talks about your credit score, for borrowing. Let’s liken this to an IQ or EQ test, the higher you score on these tests, the more is expected of you. Someone who scores high on an EQ test is naturally considered to be more responsible and reliable with problems and people. It is easier for people to commit things to them, talk to them, and relate with them, among other things. This is because they know they are responsible and can handle it.
It is the same way with a credit score, it helps investors or banks to know what and if they can take a gamble on you, that they can trust you and gauge how responsible you are with your finances. A high credit score shows that you are worth the risk and the possibility of getting back what they loan you is high; it makes them feel safer.
Overleveraging reduces your credit score and your or company’s creditworthiness, making it more difficult and expensive to borrow in the future.
Emotional Hullaballo
It will be pretty hard to sleep easy and rest pretty when you or your business is drowning in debt. It puts stress that could’ve been otherwise avoided. Naturally, when stress levels are high, your decision-making becomes impaired and you tend to make calls and judgments without thinking them through well enough.
Apart from the health risks that stress puts you through, it can lead to poor investment decisions, panic selling, or other actions; most of these actions, don’t help the situation, they just add expensive petrol to an already raging inferno.
Leveraging is a useful tool in investment and like most things, comes with its risks; but overleveraging, taking on too much debt, and biting more than you can chew, amplifies those risks in more ways. So think twice before borrowing, and cut your coat according to your cloth, not even your size this time, before you enter MMM with a soldier’s money.
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