Leverage
What does it mean
Leverage is a blanket term referring to how a borrower finances the assets of its business. A business owner has the option to finance their business through debt, equity or a combination of the two. The relationship between these two sources, is the amount of leverage in a business. The higher the proportion of debt, the higher the leverage.
Why does it matter
A banker lives in the world of leverage because what we sell is debt. Due to this, the risk posed by leverage is inevitable, but how a banker manages it is important. Overall when a business is referred to as leveraged, what they means is that a higher proportion of their assets have been financed using debt. By doing this, the level of risk increases in the business because its obligations are higher (more loans = more payments), but the reasons a business owner may choose to do this is because they still retain all of the benefits of owning the business versus needing to invest more or add additional shareholders.
Leverage is a blanket term covering a lot of individual terms, but some of the most commonly used ratios to gauge leverage include:
For all businesses, it is important to view the results of these ratios in the context of the borrower's historical ratios as well as peer averages.
Other Relevant Terms
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Greetings! I'm Clay Sharkey, and there is nothing I like more than assisting others in achieving their goals. I firmly believe that by enhancing a banker's understanding of their customer's' business, they can provide superior service. This superior service, in turn, leads to stronger relationships for the bank, improved performance for the businesses, and better experiences for our communities. Win-win-win.
