Origin of the word
The most modern use of the term leverage is with a financial meaning and can be traced to 1933. The word leverage dates from 1724 and was originally used to describe the action of a lever. By 1824, by which time the Industrial Revolution was fully underway, the scope of the word had expanded to include the power of a lever and therefore the obtaining of a mechanical advantage. The use of the word leverage in figurative terms, as a method for the accomplishment of a purpose, dates from 1858.
In business, leverage is used to describe an investment strategy for the startup or expansion of an enterprise. If a business is said to be leveraged, it has borrowed money to fund the acquisition of assets. Leverage can also be accomplished using equity – the raising of money from investors. If a company or investment is highly leveraged, it has more debt than it has equity. In the event that the investment fails, the investor stands to make a greater loss than if the investment had not been leveraged. An advantage of using borrowed funds for leverage is that the business owner retains full control of their business.
The greater the leverage, the greater the potential gain or loss. This axiom is reflected in the modern deployment of leverage to describe the use of something to gain maximum advantage or influence. For example, President Vladimir Putin of Russia has been quoted as saying: “No one wants the United Nations to suffer the fate of the League of Nations, which collapsed because it lacked real leverage.” This example implies the word leverage can be used to describe not only a financial advantage but also a strategic one.
to borrow money to buy a business, hoping that the business will make enough profit to pay the interest on the money that is borrowed.