Financial Leverage
Financial leverage is the practice of using borrowed money to potentially increase your returns.
In simple terms: instead of only using your own money, you borrow from someone else — and use that extra money to generate more income than you could on your own.
The Lawn Mowing Example
Imagine you run a lawn mowing service in your neighbourhood. Right now, you are using an old push mower that is slow and breaks down often. You can only do about 5 lawns per week and earn $50 per lawn, for a total of $250 per week.
You find out that a newer, faster riding mower would allow you to do 10 lawns per week — double the work. But the mower costs $500, and you do not have that money saved up.
You decide to borrow $500 from a family member, with an agreement to pay it back with $25 in interest over 6 months.
Here is what happens:
| Without Borrowing | With Borrowing (Leverage) | |------------------|--------------------------| | 5 lawns/week × $50 = $250/week | 10 lawns/week × $50 = $500/week | | No debt | $525 total repayment over 6 months | | Lower income ceiling | ~$125/month extra income after repayment |
By borrowing $500, you were able to double your weekly income. Even after repaying the loan with interest, you come out ahead.
This is the power of financial leverage: using someone else's money to create more value than you could with your own resources alone.
Why Is It Called "Leverage"?
Think of a lever in physics class. A lever allows you to move a heavy object with less effort by using a fulcrum. Financial leverage works the same way — borrowed money acts like a lever, amplifying your ability to generate income or build something larger.
The more leverage you use, the more you can potentially accomplish — but also the more you have to manage carefully.
Where Does Leveraged Money Come From?
Depending on your age and situation, borrowed money for a project could come from:
- Family or friends — informal loans with agreed terms
- Microloans or youth grants — many Canadian programs offer small amounts to young entrepreneurs
- Business loans — for more established projects, banks and credit unions offer loans
- Crowdfunding — raising small amounts from many people online (not technically debt, but it amplifies your resources)
As a young entrepreneur, you are unlikely to take on large formal debt — and that is completely fine. The concept still matters because understanding leverage helps you think about when and whether it makes sense to seek external resources.
In the next section, we explore the important responsibilities that come with using financial leverage.