DEBT FINANCING

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What is Debt Financing?

Debt financing is the technical term for borrowing money from an outside source with the promise to return the principal plus the agreed-upon percentage of interest. Most people think of a bank when they think of this type of borrowing, but there are actually many types of debt financing that are available to business owners.

Debt Financing vs. Equity Financing


The main difference between debt and equity financing is that equity financing provides extra working capital with no repayment obligation. Debt financing must be repaid, but the company does not have to give up a portion of ownership in order to receive funds.

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Advantages of debt financing


  • Debt financing allows a business to leverage a small amount of capital to create growth
  • Debt payments are generally tax-deductible
  • A company retains all ownership control
  • Debt financing is often less costly than equity financing

Disadvantages of debt financing


  • Interest must be paid to lenders
  • Payments on debt must be made regardless of business revenue
  • Might impact credit ratings

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