Leverage in Investing: Opportunities and Risks

How to use leverage wisely in investing and business: what counts as good debt, how to measure leverage risk, and why leverage isn't only about interest.

By Diego Alcalá · Sat Jul 25 2026 · Investing

Leverage is one of those terms we hear all the time, and depending on who is speaking, it carries either a positive or a negative connotation. You will always hear the story of someone who leveraged up and did brilliantly, and you will hear just as many stories where it went the other way.

I am not here to hand you a textbook definition. What I do want to do is invite you to look at leverage as a tool, and as a precursor to business and investment projects.

By the common definition, leverage is a financial concept describing the use of borrowed money to increase your capacity to invest and, potentially, boost the return on an investment. In essence, it means using debt or other people's resources to increase the amount of capital available to put to work.

In practice, leverage does not happen with money alone, nor does it exist only through credit. A few examples: a service company leverages its employees, a software company leverages the code it already owns, and a real estate developer leverages the cash flow from presales to begin construction.

I give these examples to make a point: leverage does not necessarily involve interest. In fact, leverage often reduces risk rather than increasing it, contrary to what one might assume.

Consider a large convenience-store chain. When it opens a new location, much of the inventory on the shelves is not owned or paid for by the chain, it belongs to suppliers on extended payment terms. If that new store fails to sell, the chain never assumed the risk on the merchandise. Mechanisms like this are exactly what allow such aggressive expansion. Taken to the extreme, nearly everything you see in the store gets paid for 90 or 120 days later, from the ice to the advertising, with the exception of salaries.

That is a useful illustration, but the question I want you to sit with is: at both the business and personal level, how could you leverage yourself creatively?

Financial leverage, the kind most of us think of first, is a fundamental tool in the world of investing because it lets both investors and companies maximize their opportunities for growth. But like everything that carries potential upside in finance, it has its risks, and using it well requires a deep understanding of its nature and implications. Let's explore how to use leverage effectively and in measured doses.

Broadly speaking, "good debt" is debt that:

In general, it is better to borrow for Capex (capital expenditures, or assets) than for Opex (operating or recurring expenses). This is part of risk management, because taking on debt to cover salaries and rent is not the same as taking on debt to acquire an asset.

Common tools for measuring leverage risk

To evaluate the risk associated with leverage, you can use:

Leverage risk analysis should always combine quantitative and qualitative dimensions. Beyond the numbers, there is always an element of "feel." That feel is not merely intuitive; it comes loaded with what you already know and years of experience, and it should not be discounted.

Criteria for defining leverage capacity

The leverage capacity of an individual or a company should depend on:

Telling good debt from bad debt

Good debt generates a return that exceeds the cost of the debt and has a positive impact on long-term value. Bad debt is associated with consumption or with investments whose return is low or uncertain, and it can erode your wealth.

Put simply, and without judging by outcome alone, whether debt is good or bad depends on its potential impact and where the money is ultimately directed. You can get a worse result than expected, and that does not make the debt bad. Just as in the markets, in business and in investing there is always an element of luck. It can and should be minimized and calculated, but we have to acknowledge that it exists.

The opportunity cost of not leveraging

We should also talk about opportunity cost, which belongs in any well-rounded estate planning calculation. Not using leverage can mean missing out on growth and returns that might have exceeded the cost of the debt. It goes without saying, but this decision has to be balanced against the inherent risk of borrowing.

What are the main types of leverage?

(Primarily used by businesses.)

Handled with prudence and knowledge, leverage can be a powerful tool for accelerating growth and building wealth. As with practically every important part of an investment or a business, it is essential to understand the risks, assess your borrowing capacity, and distinguish productive debt from unproductive debt. Ultimately, success with leverage comes down to careful planning and meticulous risk management.

In many areas of life it helps to see ourselves as "risk managers." If you take that stance, and you understand that you can control the process but not the outcome, you can mitigate the impact of something without knowing exactly how it will unfold. That is how you use tools like leverage to amplify your results without exposing yourself more than necessary.

At Buying America, this is precisely the mindset we help international investors bring to acquiring and expanding businesses in the United States: using leverage as a deliberate, well-measured tool rather than a gamble. What is your relationship with leverage, and how do you put it to work?

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