Concept Of Debt Financing
The term finance itself gives the knowledge that it is related to money, in fact many a times the world is often related to taking or collecting money. The company when in need of money has many options to raise the finance; the one such option is the debit financing. To define debit financing as per the exact definition then it can be said that the debit financing occurs when any company raises money for its working capital or expenditures by selling its bonds, bills or notes to individuals or any particular institutional investors. Thus in case the company who sells its bonds, bills or notes become debtors and the person or institutional investor who buy this financial papers become the creditor. The companies who are in need of finance have also the other option than debt financing to raise the money; that is equity financing. In equity financing the company raises money by issuing shares of stock in public offering.
When any company is in need of money it of course have the both the options to raise money; equity or debt financing, a company sometimes take the option of hybrid of both equity and debt financing. If we compare that which option is better for a company, then it can be only said that the both options have their own advantage and disadvantage. When a company raise a financing via equity option then it gives shares of the company, hence shareholders are liable for the future earnings of the company. But in case the company goes bankrupt, then in such case they will the shareholders will be the last in line to receive money. Wherein in case of debt financing, the people or institutions who purchases bills or bonds are the lenders and in case of bankruptcy they are the first ones who liable to receive the principal amount. However the debt financing provides two advantages to a company; first it is available at lower interest rates as compared to equity financing and second is that the interest on debt is tax deductible.
The company generally raises money by debt financing via banks or financial institutions. The debt financing can be divided further as; the Long term Debt financing and short term debt financing. The long term debt financing applies for the purchase of assets for a business like machinery, lands etc. While the short debt financing refers to the operations which require money for short period of time like for wages of the employees.
In simple terms, the meaning of debt financing can be remembered that it is a way to raise the money for a company by borrowing. The money raised is basically for the operating capital or any other capital required by the company. The people or institutes who lend the money are liable for the interest which the borrowing company has to pay regularly. The companies can approach for the individuals for the financing but for the taking the loan for intuitional investors they will be required to submit any collateral.
Difficulties In Understanding The Concept Of Debt Financing
The debt financing is a concept which contains many financial terms and case studies which becomes tough for the students to understand. The students are given the complex problems and situations to handle. The students are therefore required to have the complete and detailed knowledge of the topic in order to understand the case studies. The students are expected to come up with the proper assignment for the situations mentioned. This sometimes even becomes tough for the student is very good in finance. The finance is the subject which even though is easy understand in subjective terms but when it comes to the problems the things become tough, all the logics fail to fit; even when we understand the situation very well. This does not mean that the students don't know the topic but they are sometimes requiring thinking differently for a situation so they a guide who could help them.
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