Last edited 02 Dec 2019

Leverage

There are several meanings of the word leverage:

Traditionally, a lever was a slim object that, because it pivots about a point, could be used to apply leverage. So, it might entail using a rod or bar to partially raise or shift a heavy object off the ground; or, the use of a knife to prise the lid off a jar or tin. In both cases, leverage is the force that is applied at one end of the implement (lever) to achieve the desired end of moving an object.
Leverage is also said to exist when an individual, a firm or larger entity is able to steer people, situations and events to its advantage (to exert influence or force). So, for example, a main contractor may have enough leverage over suppliers to ensure they give the best possible prices; perhaps by virtue of the contractor’s size and influence.
In commercial situations, leverage is said to occur when borrowed capital is used to fund an investment, e.g where debt is incurred to grow a business, such as expanding a firm’s asset base by borrowing. In this case, leveraging is an investment strategy which uses borrowed money to increase the returns on investment. A company is said to be ‘highly leveraged’ if rather than relying on investor (equity) financing, it relies heavily on debt financing (borrowing).