Leverage refers to the use of borrowed capital or debt to increase the potential return on investment. In a business context, leverage can enhance the ability to grow and expand operations, but it also comes with increased risk.

Characteristics:

• Debt Financing: Leverage often involves taking on debt to finance business operations or acquisitions.
• Increased Potential Returns: By using leverage, businesses can amplify their returns on equity when investments perform well.
• Risk Factor: Higher leverage increases financial risk, as obligations to repay debt remain regardless of business performance.
• Operational Flexibility: Leverage can provide businesses with the capital needed to seize growth opportunities quickly.

Examples:

• A company may take out a loan to purchase new equipment, allowing it to increase production capacity without using its own cash reserves.
• A private equity firm might use leverage to acquire a company, financing the purchase with a mix of debt and equity to maximize potential returns on the investment.
• A startup may seek venture capital funding, which often involves giving up equity in exchange for capital, effectively leveraging investor funds to grow the business.