The leverage business model is a type of business that borrowed money to purchase the business or raised the money from investors.
Many mining, investments, and manufacturing business investors are using this type of business model.
They are raising money in advance from the individual investors to purchase and establish the business with a significant amount of assets.
It is a type of investment strategy in which the company is using borrowed capital to increase its potential return as well as the amount of debt the company uses to finance the assets.
The individual investors gain their profit with the company’s growth in assets.
What Does Leverage Business Model Strategy Mean?
The leverage business model is a long-term marketing and financial process.
What are the Types Of Financial Leverage?
Leverage business model is usually in two ways:
- Use of credit to increase the return to equity. An example of this is KaratBars International crypto-currencies which they are selling gold based tokens to the members or shareholders, in advance and then they go and purchase the physical gold from the mine and save it in the Karatbank as their backup.
- Competency is to gain an advantage with safe products for example KaratBars gold purchase to the clients to do the long-term investments in the right and safe investment because gold never goes bad and the price increases at all the time.
Moreover, leverage business strategy enhancing the companies’ resources to increase its outperformance by providing superior value to the customers to achieve extraordinary profit.
In both ways, the firms can use the strategic frameworks to understand how using leverage strategic models is increasing their capabilities and enhance their profit potential.
This type of business model does more with fewer resources such as well trained employees such as marketing experts and financial managers.
Why Doing More With Less, Call Leverage Business Model?
Doing more with less in leverage business is because of the following strategies;
- Better Products
- Compatible strategies
- It is based on past successes and not the future leaderships
- Also depends on compatible sub-strategies
1- The vision of leverage business model is:
the main goal of using the borrowed money to compete with the other firms in the same industries with the use of fewer resources.
When the company has a potential goal to raise money from the investors to create a new way of the business firm and all the investors are gaining based on their shared amount.
The basic calculation of financial leverage is as follow:
Total Debt of the Company / Total Equity held by shareholders
2- Better production:
In general leverage business model goal is to provide a better product with fewer resources to compete with other larger competitors.
3- Compatible strategies:
The authors first suggest that firms should implement initiatives where the need is aligned with business competencies. In doing so, the firm can create a greater impact while also learning from these projects to further hone such competencies.
For example, if a firm is strong in environmental resource management then working with a group that restores wetlands is a better idea than working to promote literacy.
The research argues that the path to profitability lies in the potential for the firm to learn from its experiences. When a firm engages in initiatives aligned with its business competencies, that learning enhances such competencies.
Wegmans, a privately-held grocery store known for its high quality food, for example, has supported local food banks for decades, contributing 16.5 million pounds of food in 2013 alone. By sending day-old bread and not-quite perfect produce to food banks, they find good uses for good food while maintaining the quality of what they sell.1
The Common Inconsistency of Leverage Business Model
1- Big Companies with more resources: We have more resources than all our competitors, therefore, we’re more powerful.
They are using different strategies such as resource-surplus which spends much on technologies but does not do employee training, technology-consumption and new product introductions.
As a result, they are wasting too much of their resources which can lead to serious problems.
2- Small Companies with fewer resources: We have fewer resources and must innovate more and offer better products to compete with our competitors.
Accomplish more opportunities with the right niche market and less confrontational comparing to the bigger firms.
They are focusing on more skills and capabilities of doing more with fewer resources, as well as finding alternative ways of doing better manufacturing comparing to their competitors.
There are no sufficient resources but they can succeed by their innovation instead of copy replication.
Small firms should not try to match dollar-for-dollar with their competitors, but they can find a way to match existing advantages to become strategically more competitive.
What is a Resource-based View of Business Strategic Leverage?
The main strategy is doing more with fewer resources, establishing strategic alliances, building more clients, using skilled resources across business models.
Resource-based on the firms is not referred to as the financial resources only and it’s referring to technical resources and the human resources as well.
An example of limited resources constraints with success: e-Bay, Amazon, KaratBars International.
On the other hand, an example of companies with plenty of resources which could not yet sustain success; General Motors, General Electric, Sears and so on.
Index of Leverage Business Model Resources
The ratio of relative shares of investment or investors or resources.
Growth of revenue.
- Concentrating on the key strategic goals, every individual function, and units within the organization must focus on the same organizational goal.
- All the members should understand the main purpose of the investment program of the companies and their goals.
- Accomplishing the resources by integrating a resource with another resource.
- Should not concentrating on one resource and ignore the others and should establish the priorities to use the resources in the best use.
- A company accumulating resources with learning form experiences and continuously learning new things is the key.
- Outsourcing if it’s necessary to implement better quality products or services.
- The complimenting resources by mixing products and combinations such as strong on product quality and arrangement of the good marketing structure.
The time between the outflow and inflow of the revenue should be fast enough to recover the resource and as a result, that type of firm doing twice better than its competitors.
For example, Detroit Carmakers introduce a new model every eight years while Honda introduces a new model every 4.5 years and they can recover their investments sooner than their competitors.
However, a good strategic leverage model provides the answers to many of business strategies issues.
Types of Financial Leverage Model:
1- The funds raised through Owners and Creditors’ equity and usually the long-term finances are used for the sources of capital.
2- Create your passive income in leverage business model.
In today’s usage of technology and the internet, the compete with the highly competitive market is very important.
People are looking for such a business to make passive income which is making money while you are away, sleeping and so on.
Generally, people who want to make an automatic passive income are more interested in the leverage business model.
Also, people with less time but to make money from home in their minds are taking action and more interested in this type of business.
Investors are the shareholders of the business as well and they will gain and make money when the firm makes money or the value of the firm increases because of the advanced sales in their future productions.
In the other world, the percentage of payable to the investors should be greater than the borrowed loan interest payable.