Debt Financing

Debt Financing

Debt refers to capital that is loaned by a lender to a borrower, who is in turn obligated (1) to repay the original amount loaned--or the principal--within a specified time period, and (2) to pay interest on the principal.

In fact, you are probably more familiar with debt capital than you think. Common types of debt include credit cards and mortgages.

While the terms under which the loan agreement is made are often in writing and are legally enforceable, lenders seek to protect their investment by lending debt capital only to those entities which demonstrate the ability to repay it at a desirable interest rate. In some cases, lenders further protect their investment by offering secured debt capital. If secured debt capital is not repaid according to the agreed terms, a lender may have the right to take possession of the securitized assets--or assets that were promised to the lender in the event that the loan was not repaid.

Therefore, debt capital is most appropriate for those companies that can demonstrate stable cash flow and/or those companies that have a significant asset base.

Debt capital ranges from credit cards and lines of credit to bank loans and high yield debt. The type of debt that is best for your company depends on many factors. For example, relevant factors include the amount of capital your company needs, the size of your company, and the financial state of the company (including the existing capitalization of the company, or how your company is currently financed).

Depending on the type of debt your company seeks, there are numerous sources of debt capital, including commercial banks, credit unions, the government, credit card companies, community organizations, and specialty finance companies.

Back to Sources of Capital.