understanding financial jargon
Gearing (also known as leverage) is where an investor or company, borrows money in order to enhance investment returns. For example, if an invester has £100,000 to invest and they can get a rate of return of 10% per annum, they will earn £10,000 per annum. If the investor can borrow another £50,000 at 5% per annum interest, they now have a total of £150,000 invested giving a return of 10% per annum (£15,000), but with an interest charge of £2,500 per annum, giving a net return of £12,500.
When the investment is liquidated, the borrowing is paid back. From the investors point of view, the investment has returned 12.5% per annum on his original investment of £100,000.
Unfortunately gearing can also work in reverse and magnify losses. If in the examples above, the total capital investment of £150,000 were to halve to £75,000, and the investment liquidated, the investor still has to pay back the £50,000 borrowings leaving just £25,000 of his original capital, a loss of 75% rqthe than just 50%.
What to do if you need more help
If you need more help with your specific commercial loan, mortgage or insurance requirement please speak to a professional financial adviser.
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