Debt Financing

A method of raising capital through borrowing. Although commonly associated with lending from a bank, debt financing includes selling debt instruments to individual and institutional investors, often seen in practice by corporations through the use of bonds. The cost of debt is the price of interest payments to either the lender or bondholder.

Debt financing differs from equity financing in that the borrower is not giving up ownership in exchange for capital. Instead, the lender is promised timely principal and interest payments, while often guaranteed first repayment before any other equity holder. Lenders are said to be at the top of the capital stack, and have the highest claim to any liquidated assets.

 

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