Debt Financing

Definition - What does Debt Financing mean?

Debt financing is when a company finances some of its expenses by assuming debt. The way this works is that the company will sell bonds, notes or bills to investors. These sales essentially function as loans. The investors give the company money through purchasing these bonds, notes or bills, and the company must repay the principal over time, plus interest. These agreements are legally binding.

Justipedia explains Debt Financing

Oftentimes, a company may need more money to expand or maintain its business. For example, a company may desire to purchase a new piece of property. If it doesn't have the money on hand to make the purchase, then it can use debt financing to generate the funds. All of these funds must eventually be paid back—however, plus interest. The benefit of debt financing is that it allows companies to spend beyond their means. The risk is that if they don't make up the difference in future revenue, then they could default and face punitive consequences.

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