Leverage refers to increasing the use of debt relative to equity as a means of financing the business. The higher the farm-debt-to-equity ratio or "leverage ratio," the more total capital supplied by the creditors and the less by the business owner. Lenders are particularly interested in this ratio because it shows the proportion of risk they are taking in comparison to the owner (a higher ratio indicates that the business is increasingly financed by debt rather than equity). In general, the greater the loan risk and the longer the terms, the lower the ratio desired by the lender.
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Why is the "farm-debt-to-equity" ratio referred to as the "leverage ratio"?
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