What is debt finance?
debt finance is the practice of issuing bonds on the capital markets of companies. It is an alternative to financing capital, which is the issue of shares on financial markets. Debt financing can be selected on its own capital, as bonds, including investment banking costs, are smaller than their own capital fees. The purpose of issuing debt is to increase capital for business action, such as project, extension or product development.
When the company turns to debt financing, it issues corporate bonds to capital markets. Investors who become bond holders or debt holders provide loans and, in return, the creditors receive promised interest and principal payments, known as coupons during the loan. When the loan period reaches its due date, investors receive the nominal value of the bond. The average binding life is between seven and 30 years. The advantage for debt issuing is that payments that are carried out to bond holdersIt is remedied as a tax deductible and can therefore be considered as an expenditure on the company's profit statement.
Investors who buy business debt risk less risk than shareholders. Unlike shares holders, debt holders may rely on consistent income, as the company is obliged to pay them regular distribution of principal and interest. Shareholders can also receive dividends distribution, although bond holders are the first to be paid out of cash reserves. In addition, if the company gives the debt holders to receive a higher priority to be repaid over the holders of their own capital, although bond holders are second in accordance with the company creditors, including its suppliers.
debt financing is also associated with risks and disadvantages. In the case of corporate bankruptcy, the company's assets are at risk of being taken over by the largest DRbond bonds if misses any planned interest or principal payments. For example, if the company does not fulfill the terms of loans that have been issued as part of debt financing, bond holders can cause the company's assets to be liquidated to be paid. The company that is active in debt should show discipline with its money reserves and also outline the expected profits during the loan period. With future cash flow, it is active for the company in the area of debt financing compared to debt financing compared to debt financing due to obligations for payments.