What is Leverage? Definition or Meaning

In a business context, leverage refers to using financial instruments of some kind to achieve financial gain. The leverage may be borrowed capital or equity and it can add to the value of the company or asset and increase its gain as a result. By the same token, using leverage to buy can also magnify loss, if the investment goes wrong, so using leverage to invest is not without risk!

For example…

Simone, the bakery owner is over the moon. You see, she’s found out that the shop next to hers in the mall is vacating as their lease is up. She had been wanting to expand her bakery to cater for bigger demand for a long time now. However, she doesn’t have the cash needed to rent the next door premises lying around though. Taking out a business loan is the leverage she needs to expand her business. But Simone needs to be careful that her existing debts are not too big in order for the new leverage to pay off.