What Is Financial Leverage?

Financial leverage refers to the practice of using borrowed funds or debt to finance investments or operations, with the goal of increasing potential returns. In other words, financial leverage is the use of borrowed money to magnify gains or losses.

Leverage is a common strategy used by individuals, companies, and investors to increase the return on their investments. By using borrowed funds, an investor can increase the size of their investment, and thus the potential return. This is because they are able to control a larger asset base with a smaller amount of their own money.

However, using leverage also increases the risk of losses, as any losses will also be magnified. This is known as the leverage effect. If the investment loses value, the investor may be required to repay the borrowed funds with interest, even if the investment does not generate enough returns to cover those costs.

There are several types of financial leverage, including operating leverage, financial leverage, and combined leverage. Operating leverage refers to the use of fixed costs in a business, such as rent or equipment, to increase profits. Financial leverage refers to the use of debt financing to increase returns. Combined leverage refers to the use of both operating and financial leverage.

Financial leverage can be measured using the debt-to-equity ratio, which compares a company's debt to its equity. A high debt-to-equity ratio indicates that a company has a significant amount of debt relative to its equity, which increases the risk of financial distress if the company is unable to generate enough profits to service its debt.

Financial leverage can also be used in the context of charitable giving. Charitable organizations can use borrowed funds to finance their operations or fundraise for specific projects, with the goal of increasing the impact of their giving. By using leverage, charities can stretch their resources further and potentially achieve greater outcomes than they would with just their own funds. 

However, as with any use of leverage, there is also increased risk and potential for financial distress if the charity is unable to generate enough donations to repay the borrowed funds. It is important for charities to carefully consider their risk tolerance and fundraising goals before using financial leverage.

Charitable giving is an opportunity to bless others as Christ blessed us. It’s also an important part of a sound financial plan. The Canadian National Christian Foundation provides philanthropic advice and wants to connect God’s money with God’s work. 

Our staff, our leadership, and our board are all believers who want to help you manage your assets and guide you through creative giving solutions that also benefit you. We can handle non-cash gifts efficiently, getting the money into the field as soon as possible with 100% of your principal always available for your charitable grant recommendations. You can get started by opening a donor-advised fund today!

About Canadian National Christian Foundation

CNCF is a community of givers who are seeking to advance the Kingdom of God by connecting the resources God has entrusted to them with His work on earth.

Similar to other public foundations, CNCF’s difference is the commitment of its staff and directors to the Word of God, its non-denominational history and status as a Christian foundation, and its ability to allow donors to donate anonymously, at a time and gift value of their choosing.  Learn more by visiting our website.