DEBT FINANCING
Debt Financing involves raising money by borrowing money that will be paid back over time with
interest. The principal must be paid back in full by the maturity date, but periodic repayments of
principal may also be part of the loan arrangement. Debt may take the form of a loan or the sale of
bonds. The debt can be short term which will be less than a year, or long term which will be more than a
year. The only obligation to the lender is the repayment of the loan.
ADVANTAGES OF DEBT FINANCING
One of the main advantages is that debt financing provides funding without diluting the
ownership of the company. Debt financing allows the owner to have full control over their business
without outside interference, meaning they won’t have to consult with investors before making
decisions.
With debt financing, lenders do not have a claim on any future profits of the company. They are
limited to receiving an amount equal to the loan principal plus interest. Interest and principal
repayment are based on fixed percentage and can be forecast.
Another benefit of debt financing is that the repayment terms are predictable, which allows for
more accurate budgeting and planning as well as retention of a larger percentage of profits
A debt that is paid on time can enhance a small business’s credit rating and make it easier to
