Debt financing involves repaying a loan with interest, providing control over operations while obligating scheduled payments. Investors may choose debt financing for fixed repayment terms and interest income.
Debt financing involves obtaining a loan that must be repaid with interest over time. Unlike equity financing where ownership in the company is sold to investors in exchange for capital, debt financing requires repayment regardless of the company's performance.
For example, when a firm borrows from a bank or issues bonds, it incurs a liability and commits to scheduled interest payments. Debt financing provides the advantage of maintaining control over operations but comes with the responsibility of repaying the borrowed amount and interest.
Investors may prefer debt financing over equity financing because it offers a fixed repayment structure and allows them to earn interest income without ownership stakes in the company.
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