What does leverage refer to in a business context?

Leverage in a business context specifically refers to the use of borrowed capital to increase potential investment returns. Companies utilize leverage by borrowing funds to invest in projects, expecting that the returns generated from these investments will exceed the cost of borrowing. This strategy allows businesses to enhance their capacity for growth and expansion without needing to use entirely their own resources.

Utilizing financial leverage can amplify returns on equity, but it also introduces higher risk. If the investments yield lower returns than anticipated, the company may struggle with the burdens of debt repayment. Therefore, understanding leverage involves recognizing the balance between potential gains and associated risks.

The other options focus on various aspects of finance and business operation but do not accurately encapsulate the core meaning of leverage. Internal funds, risk avoidance, and restrictions to internal resources do not relate to the concept of using borrowed capital to enhance investment potential.