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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Operating leverage

What is operating leverage, and why does it matter to a lender?

ONE OF 180 TERMS · FREE · NO SIGNUP

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

Operating leverage is how much of a business's cost base is fixed: the more of it there is, the harder a fall in sales lands on profit, and the faster a rise lifts it. Two businesses with the same profit today can have very different resilience — one owning its plant, with mostly fixed costs, the other buying capacity by the job. A lender reads it beside the debt, because fixed costs and debt service are both bills that do not shrink with the sales.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WHAT IT IS NOT

Operating leverage is not financial leverage: it is about the fixed share of the operating costs, not the borrowing.

// WORKED IN

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