Glossary - Debt Financing
Debt financing refers to the practice of borrowing funds from external sources with the obligation to repay the principal amount along with agreed-upon interest rates over a specified period. It is a method utilized by companies and governments to raise capital without giving up equity or ownership in the business. Debt instruments can include loans, bonds, and lines of credit.
Also known as
- Borrowing
- Leveraging
- Loan financing
Use cases examples
- Term Loan Agreement: The Company shall receive a term loan of $2 million from the Bank, to be repaid over five years at an annual interest rate of 6%.
- Bond Issuance Prospectus: The Corporation intends to issue $500 million in corporate bonds, with a maturity period of 10 years, at an annual coupon rate of 5%.
Considerations for investors
- Evaluating the borrower's creditworthiness and the likelihood of default, which can affect the safety of the debt investment.
- Assessing the terms of the debt, including interest rates, maturity, and collateral, to ensure they align with the investor's risk tolerance and investment objectives.
Considerations for founders
- Understanding the cost of debt and its impact on the company's financial health, including the ability to meet interest and principal payments on time.
- Considering the implications on cash flow and whether the business can sustainably service the debt, especially during early stages or periods of low revenue.
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