Accounting Dictionary

Leverage

Borrowing money to finance your business.

John needed $100,000 to start his business. He borrowed $95,000 of that money. His business is highly leveraged. With only $5000 of his own money he has an opportunity to make a lot of money. If he doesn’t make money and can’t repay his loans, his creditors may try to get some of their money back by forcing him into involuntary bankruptcy. Mary needed $100,000 to finance her business. She borrowed $2000. Her business is not highly leveraged. She needed a lot more of her own money but if the business has a bad year she can try again next year because her creditors will not force her into bankruptcy over a $2000 debt.

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