If you sell a tee shirt for $5 each on the street, and you bought that tee shirt at $1 from a wholesale supplier, your net profit is $4 and your profit margins from spending that one dollar are 400%.
Let's say you don't have any cash, or prefer not to use your own cash, to buy the tee shirts, so you decide to borrow $10 from someone and agree to pay them back $15, that's basically 50% interest.
Now you used the $10 to buy 10 more tee shirts and end up selling the all the tee shirts you bought for a total of $50 in gross revenue. You then pay back the lender their $10 plus the $5 in interest.
Your net profit is still $35 and your profit margins are still at 350% and you are running a profitable business despite borrowing money at 50% interest!
This simple example can be expanded and scaled at a much higher level, and seeing the bigger picture can still be related back to this simple business model. Looking at a business's profit margins can help determine how it can afford to take on a loan.
When we take this example of leveraging more money to buy more resources at a lower cost, investing and selling services/product at a higher rate of return to generate more income and more profits, using the net profits to save and re-invest into your business to increase efficiency and improve overall financial effectiveness, we can create a whole new game. Sounds easier said than done of course!
In conclusion, leveraging the business model's profit margins are key to determining how much a business can afford to borrow as a loan
and have that business reach the next level of its financial growth.