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refers to using debt instead of equity to increase company funds. Usually, leverage is used to avoid "giving up" equity. The cost of preserving equity is the debt service payments required to service the company’s loans. These payments reduce earnings and require funding themselves. A company that has high debt in relation to its equity is said to be highly leveraged. Leverage is used also to refer to a strong negotiating position caused by a compelling need of the other party. If a company cannot meet a large loan payment without an investor’s funding, that investor may use his leverage to obtain concessions from the company he might not otherwise obtain. See: Bridge Loans, Cash Flow, Cram Down, Debt Service, LBO (Leveraged Buyout), Negotiation. |
