Financial Leverage occurs when a business or individual uses debt or other financial instruments as a means to increase the potential return on equity or investment. Essentially, it involves borrowing funds in the hope of achieving a higher return than the cost of the borrowed funds. By utilizing financial leverage, businesses can potentially scale their operations faster or undertake large projects that would otherwise be unfeasible with only their own capital.

For example, if a company takes on a loan to finance the purchase of equipment, the aim would be for the additional production and revenue from the equipment to surpass the cost of the loan and interest payments, thereby resulting in increased profitability. However, if the revenue generated does not offset the borrowing costs, financial leverage can lead to increased losses. Thus, while leverage can amplify returns, it also intensifies risks, as the obligation to pay interest or return borrowed funds remains regardless of the outcome of the investment.

In summary, understanding and managing financial leverage appropriately is critical for maintaining a balance between achieving higher returns and mitigating risks, making it a crucial aspect of financial management in both businesses and personal finance.