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).
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