What Is Leveraged Finance

Leverage in terms of finance is using borrowed capital as a funding source when a company is investing to expand its asset base and generate returns. It is an investment strategy of using borrowed money to increase the return of an investment. The goal is to multiply the potential returns from a project being done. This concept is used by both companies and investors. Investors use leverage to increase the returns that can be provided on an investment. Companies use leverage to finance their assets, where instead of issuing stock to raise capital, they can use debt financing. Debt financing can be used to invest in business activities in an attempt to increase shareholder value. Debt financing means when a company raises cash for working capital or capital expenditures by selling bonds, bills or notes to individuals or investors. 

Here is an example of a leverage. A company is formed with an investment of Rs. 50 lakhs, so the equity in the company will be Rs. 50 lakhs. The company will use this money to operate business. If the company uses debt financing by borrowing Rs. 40 lakhs, it now has Rs. 90 lakhs to invest in business operations.