What Are the Pros and Cons of Debt Capital?

The capital structure of traditional financial concepts includes equity capital and debt capital. Debt capital refers to short-term and long-term loans provided by creditors to enterprises, excluding commercial credit liabilities such as accounts payable, bills payable and other payables. The use of debt capital can reduce the cost of corporate capital. From the perspective of investors, the risk of equity investment is greater than that of debt investment, and the required rate of return will increase accordingly. Therefore, the cost of debt capital is significantly lower than equity capital. Reasonably increasing the debt financing ratio within a certain limit can reduce the comprehensive capital cost of the enterprise.

Debt capital

Right!

Traditional financial concept

Debt capital is a foreign aid capital commonly used by Western banks in the 1970s. But in the 80s

Corporate debt capital

Debt-to-capital refers to a debt restructuring method in which the debtor converts debt into capital, while the creditor converts debt into equity. However, if the debtor converts the payable convertible corporate bonds into capital according to the conversion agreement, it is a debt-to-capital under normal circumstances and cannot be treated as debt restructuring.

When debt is converted into capital, for a joint stock company, debt is converted into equity; for other enterprises, debt is converted into paid-in capital. As a result of turning debt into capital, the debtor will increase its share capital (or paid-in capital) as a result, and the creditor will increase its equity as a result. ^[1]