Debt Financing

Business Finance

Debt financing raises capital through loans — bank loans, lines of credit, bonds, notes, mezzanine debt. Must be repaid with interest, with covenants restricting business decisions. Doesn't dilute ownership. Interest is typically tax-deductible. Debt is cheaper than equity but riskier — required payments must be made regardless of business performance. Appropriate for businesses with predictable cash flows. Debt covenants often restrict leverage ratios, capex spending, dividends, and acquisitions. Senior debt has highest claim in bankruptcy; subordinated debt comes after; mezzanine debt sits between debt and equity. The 'optimal capital structure' balances debt's lower cost with its higher risk.