Leverage is the relationship between debt financing and equity financing, also known as the debt-to-equity ratio.
Equity is created by the personal funds of the business owner(s), and/or by the stockholders of shares in a corporation. As these funds have no claim on any of the assets of the business, the assets are available to be used as collateral for debt financing.
You can think of leverage as shorthand for your business's ability to get funding. Higher equity creates increased leverage and vice-versa. If your business is fully leveraged, it won't be able to borrow money.
Suppose you applied for a small business loan of $3000 and were prepared to make an equity contribution of $1000. This would be a debt-to-equity ratio of 3:1.
Whether or not this would be an acceptable ratio to the lender depends on the lender and your business' position. If, for example, you are just starting out, a lender may insist on a debt-to-equity ratio of 1:1.
