Debt Financing

Debt financing is a method of raising capital by borrowing funds from external sources, rather than issuing shares of ownership in the company. In debt financing, a business borrows money that it agrees to repay with interest over a set period of time.

Types of Debt Financing:

• Bank Loans: This is the most common form of debt financing, where a business borrows money from a bank and agrees to repay it over a specific period with interest.
• Bonds: Companies can issue bonds to investors, who then become creditors and receive interest payments until the bond reaches maturity.
• Lines of Credit: Businesses can establish lines of credit with financial institutions, allowing them to borrow funds up to a certain limit as needed.

Advantages of Debt Financing:

• Interest on debt is tax-deductible, reducing the overall tax liability of the company.
• Debt financing allows businesses to maintain full ownership and control over their operations.
• Debt can be a more cost-effective option compared to equity financing, especially for established businesses with a steady cash flow.

Disadvantages of Debt Financing:

• High levels of debt can lead to financial strain and increase the risk of bankruptcy if the business is unable to meet its repayment obligations.
• Interest payments can be a fixed cost, regardless of the company's performance, leading to potential cash flow issues.
• Too much debt can negatively impact the company's credit rating and limit its ability to secure future financing.