Businesses can deploy a number of strategies to improve profitability, including streamlining processes, outsourcing and integrating new technologies. Financial leverage offers an alternative way to increase profits by financing a portion of the business through loans or by issuing stock. Although financial leverage carries risks, it can provide a number of advantages.

Increases Available Money

For many businesses, financial leverage provides the advantage of freeing up a sizeable portion of cash in the short term. The business can use this free cash in a number of ways. For example, if a business produces ballpoint pens, and a new machine hits the market that can increase the efficiency of ballpoint pen manufacturing by 30 percent, it can use the free cash to purchase the machine outright. The business might also invest the money in marketing a new product or save it against future sales slumps. While borrowed money does require long-term payments, these payments are typically small and predictable.

Shareholder Profits

A business that uses financial leverage can produce higher shareholder profits than businesses that only employ stock sales for financing. In businesses that only use shareholder equity, increases in business profit correspond exactly to increases in per-share stock value or dividend payments. If the profit increases 2 percent, shareholders get 2 percent more. When a business takes on a loan, the improved profitability of the business does not impact the loan payment. The difference in profitability yields higher value per share or increased dividends. If the profit increases 2 percent, shareholders of a business with financial leverage may see, for example, an increase in dividend payments of 3 percent.

Better Credit

The high rate of business failure often leads lenders to be somewhat risk-averse, even for businesses that seem financially stable. Securing even small amounts of financial leverage and paying consistently on the borrowed funds can help to improve the overall credit rating of the business. The next time the business seeks credit, it can often secure better options in terms of repayment length and overall interest rate. Because a business can need financial leverage a number of times over the lifetime of the business, improving this credit rating represents a long-term investment in itself.


Financial leverage does not guarantee an improvement in profitability. All businesses must cope with a degree of uncertainty regarding future sales, but businesses offering new or untested products and services run much higher risks of failure. As a consequence, securing financial leverage for such businesses may come at the cost of unfavorable interest rates and higher dividend payments for stockholders, which makes it more difficult to improve profitability. Businesses offering products or services with a demonstrable track record with consumers can often secure financial leverage at more favorable rates.