Short definition: Debt financing is the process of raising capital by borrowing money from lenders, with the promise of repayment with interest over a specified period.
Explanation: It involves taking out loans from banks, issuing bonds, or obtaining credit lines from financial institutions. Debt financing allows companies to access capital without diluting ownership but requires regular interest payments and repayment of the principal amount.
Example: A company might take out a bank loan to finance the construction of a new factory or issue bonds to raise capital for expansion projects.
Additional information (optional): Debt financing can be a cost-effective way for businesses to access capital, especially when interest rates are low. However, it also increases a company’s financial leverage and risk, as it must make regular interest payments and eventually repay the borrowed amount.