What is negative leverage?

Negative leverage, also known as over-leverage, occurs when a company or an individual borrows more money than it can effectively manage with its available resources. This means that the level of debt is higher than the equity or assets involve. This can cause severe financial problems if the borrower cannot repay the loans, leading to bankruptcy.

Negative leverage can also result in high-interest costs and debt service payments, which can erode the profits of the borrower and lead to financial instability. Additionally, over-leverage can affect credit ratings and result in higher borrowing costs over time, as lenders perceive the added risk of lending to an over-leveraged borrower.

To avoid negative leverage, it's important to carefully manage borrowing and maintain adequate equity levels. This can involve prudent financial planning, careful cost management, and an eye towards long-term financial health. In some cases, it may also involve repaying existing debts and restructuring the financial structure of the company or individual.