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What does leverage mean and how does it apply to business?

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Submitted : 2018-06-15 04:34:13    Popularity:     

Tags: leverage  apply  business  

Financial leverage can improve the returns to equity owners is the business is profitable, able to cover its interest payments, and has the cash flow to repay t

Answers:

Financial leverage can improve the returns to equity owners is the business is profitable, able to cover its interest payments, and has the cash flow to repay the debt principal. However, if there is a downturn in the business, the effect of the high financial leverage is to amplify the decline in the return on equity to the owners.

Leverage is the amount of debt you can take on in order to finance a deal.

Example - If I pull off a 'heavily leveraged deal' to acquire a thriving business that means that I was able to get a huge loan (acquire debt) in order to buy the business. (However, I will then have to pay off the debt and in a heavily leveraged deal that means selling off some of the business assets and laying off employees)

If I buy a business with my own money (let us say I sold a bunch of Apple stock that my grandma bought for me in 1992) then i would not be 'leveraged'.

Think of the word 'lever'. A lever allows you to move something that you cant move by yourself because it is to heavy. It is a tool.

Debt (leverage)is a tool. It allows you to get things you otherwise cannot afford to buy in cash.

leverage can apply to business or individuals. to simplify it, leverage is the ability to borrow based on many different factors. for a business, leverage may entail evaluating the revenue of a business and its future estimates of revenues (by itself or others at the bank) and the risk of borrowing a certain amount of money.

Leverage is a business term = how a business acquires new assets for startup or expansion. If a business is "leveraged," it means that the business has borrowed money to finance the purchase of assets.
Businesses can also use leverage through equity, by raising money from investors.

[*] It may also mean, that an interested party has "Information" that the businessperson *might* not like to have revealed. A form of silent Extortion.

A simple example is the down payment on a house you are buying. You put $100,000 down and you live in a $500,000 house.



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