understanding financial jargon
Leverage (also known as gearing) is where a company, or investor borrows money in order to enhance investment returns. For example, if a business is 100% equity financed by investors, and has assets of £100 million, if those assets doubled in value and the firm was liquidated, the investors would have doubled their money.
However, if the original start-up capital was 50% debt (£50 million) and 50% equity (£50 million), if the firms assets of £100 million doubles as before and the company is liquidated, the investors do better. After paying off the £50 million debt, the investors receive £150 million for a £50 million investment, or triple their original investment.
Unfortunately leverage can also work in reverse. If in the examples above, the company assets were to halve to £50 million, the non-leveraged investors would get back 50% of their original investment, on liquidation. However the leveraged invesors would receive nothing because the value of the company on liquidation would only be enough to repay the debt to the lender, with nothing left over for the investors.
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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