what is leverage in business

Leverage in business refers to the use of debt or borrowed capital to undertake an investment or project. It is commonly used as a way to boost an entitys equity base. Investors use leverage to significantly increase the returns that can be provided on an investment, while companies can use leverage to finance their assets. By using leverage, businesses can launch new projects, finance the purchase of inventory, and expand their operations without giving up ownership stakes in the company. Leverage can be especially useful for small businesses and startups that may not have a lot of capital or assets. Two ratios are used to measure a company’s leverage: Debt-to-equity and debt-to-total-assets. When revenues are growing, payments are made with comfortable surpluses, and additional debt is acquired to take advantage of market opportunities. However, when revenues are low, a highly leveraged business might fall behind on debt payments and might not be able to borrow additional money to stay afloat.