Debt Financing

Definition - When a company borrows money to be paid back at a future date with interest it is
known as debt financing.

- Debt means the amount of money which needs to be repaid back and financing means
providing funds to be used in business activities. It is a time-bound activity where the
borrower needs to repay the loan along with interest at the end of the agreed period. 

Features

- An important feature in debt financing is the fact that you are not losing ownership in the
company.
- If a company needs a big loan then debt financing is used, where the owner of the company
attaches some of the firm’s asset and based on the valuation of those assets, loan is given.
- Another important feature in debt financing is that the loan is secured or collateralized with
the assets of the company taking the loan.
- Debt financing is an expensive way of raising funds, because the company has to involve an
investment banker who will structure big loans in a systematic way. It is a viable option
when interest costs are low and the returns are better.