Ace the DECA Financial Consulting Challenge 2025 – Unleash Your Business Superpower!

Financial leverage refers to the use of borrowed funds to increase the potential return on investment. When a business or investor uses debt (loans or bonds), they amplify their capacity to invest more than they could using only their own capital. This can lead to higher returns if the investments perform well, as the profits from those investments can significantly exceed the costs of the borrowed funds. However, it also entails greater risk, as the business must ensure it can service the debt through consistent cash flows.

In contrast, increasing capital through crowdfunding involves raising funds from multiple individuals, which is fundamentally different from leveraging debt. Reducing overall business expenses is a separate financial strategy focused on cost management rather than how capital is structured. Lastly, equity financing refers solely to raising capital by selling shares and does not involve borrowing; thus, it does not encompass the concept of leverage. Therefore, the correct definition of financial leverage lies in the use of borrowed funds to aim for enhanced investment returns.