Yes profit can be borrowed. Multiple large companies are using borrowed funds systematically to
increase profit. It has to be a calculated decision. Its not a play of child. It should be based on income
expectations rather guarantee or confidence. Since these articles are for small business owners we would be keeping it simple. I will explain effect
of borrowed funds ie. effect of a loan on profit of a small business. Lets go through a practical
example for better clarity. I will not get in to advanced calculations of “confidence level of expected
returns” etc.- I will keep it super simple for a layman to understand. Solve below example (before I do) and check whether you are on a right track of thought process.
Solve below example : Profit would decrease by how many percentage if a loan is costing 12 % ?
Detailed Question: Profit would increase by how many percentage if a loan is costing 12% ? Given a normal scenario where a vegetable trader trades at 5% profit margin . He normally get 30,000Kg of potatoes for Rs. 15,00,000/- He sells on an average 1000Kg of potatoes for average price of Rs 53. Assuming other normal conditions calculate difference in his profit is he takes a loan and if he do not avail a loan facility. Profit would decrease by how many percentage if a loan is costing 12% ?
Before reading further do own calculations and check whether you are on a right track. After arriving at own answer click a link below to cross check.
If a loan is taken in a very very competitive market, profit would be nil. But if market conditions are highly favorable , loans would not be harmful. Above example proves impact on profit is higher in either case if a loan is taken. Impact on profit would not be at a rate of interest which is charged. But at a much higher rate.
