When is a business likely to use leverage?

A business is likely to use leverage when it seeks to expand operations quickly through borrowed funds. Leverage involves using borrowed capital to increase the potential return on investment. By using outside funding, a company can take advantage of growth opportunities that may require significant capital that it does not currently have available. For example, purchasing new equipment, expanding into new markets, or acquiring another company are all scenarios where leverage can amplify growth potential.

Utilizing leverage allows businesses to invest in these opportunities rapidly, positioning them to capitalize on market conditions and improve their competitive standing. While this can lead to greater profits, it is important to manage the associated risks carefully, as excessive leverage can also lead to substantial losses if the investments do not perform as expected. This is why many businesses carefully evaluate their leverage ratios and related financial metrics when making such decisions.