Financing 101

A Better Way to Leverage Your Profit

What do companies typically do with their net income? Do they reinvest it all? Do owners bag it entirely? Do they pay dividends more often than not?

Let's see:

• Mature companies: Payout ratios typically range from 30% to 50%.

• High-growth companies: Often reinvest earnings, with payout ratios near 0%.

• Stable companies: Payout ratios can reach 50% to 70%.

Micro-businesses in emerging markets could adopt a hybrid approach: partially investing in growth directly, plus raising capital and paying back investors through their disposable profit.

Equity vs. Debt Financing

Equity financing isn’t ideal for businesses with limited growth potential, especially in small markets where investors seek high returns. This is even more challenging in emerging economies where venture capital is scarce.

Debt financing, through term loans (5–10%), business lines of credit (5–12%), or revenue-based financing, is a better option. However, businesses less than two years old often struggle to secure loans due to a lack of a proven track record, revenue history, and collateral. This is true even in most EU countries and U.S. states.