Debt Financing

Debt financing is financing a company by selling the bonds, notes or mortgages held by the business. Basically, it is borrowing money to keep your business running. Long-term debt financing is typically associated with larger assets such as buildings, equipment, land, and large machinery. The schedule for repayment for long-term debt financing spans for more than a year. Short-term debt financing is mostly associated with operations of the business such as inventory purchasing, payroll, and supplies. The repayment of short-term debt financing happens in less than a year. With debt financing, your business does not have to give up future profits or ownership in the company like with equity financing.

Debt financing is more commonly known as selling bonds or debentures. Debentures are tools used by large companies to raise capital for their projects and operations. This is known as a debt offering since the company literally goes into debt to the investors until the price of the debenture is paid back, plus interest, or until it is converted into stock. The company must record this debt on its balance sheet. If bankruptcy occurs, the debenture holders are considered creditors and must be paid back by the company’s remaining assets. Debentures are a way for companies to raise capital without having to use their assets or give up ownership of their company. This leaves their assets free to do other things to generate capital for the business.


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