Advantages and Disadvantages of financial leverage

Financial leverage should be gained whenever possible. It is better to risk other’s money and not one’s own. One’s equity should always ask for higher rate of return then the rate one pays for the loan. By maximizing debt to equity ratio, one can gain the most out of one’s investments. Many are still unsure about what is debt financing but it is the way corporate houses raise money for business and gain leverage. Financial leverage is the ability of a business to maximize gains to equity shareholders by use of debts and all other fixed income securities.

Financial risk is part and parcel of financial leverage and the variability in earnings that are available to shareholders because of debt financing and exchange in rate fluctuations. If one has a higher financial leverage, then the financial risk would also be high because of obligations towards the liability and increased chances of insolvency. However, with the advantages of debt financing being put to good use, it is possible to get the kind of financial leverage one wants.