Debt financing refers to the process of raising capital by borrowing money that must be repaid over time, usually with interest. This type of financing is commonly used by businesses to fund operations, expansion, or other significant expenditures.

Characteristics
– Repayment Obligation: Borrowed funds must be repaid according to a specified schedule.
– Interest Payments: Borrowers are required to pay interest on the borrowed amount, which can vary based on the lender and the terms of the loan.
– Collateral Requirement: Some debt financing options may require collateral, which is an asset pledged to secure the loan.
– Impact on Cash Flow: Regular interest and principal payments can affect a company’s cash flow and financial stability.
– Tax Deductibility: Interest payments on debt may be tax-deductible, providing potential tax benefits to the borrower.

Examples
– Bank Loans: Traditional loans from banks or credit unions that provide a lump sum of money to be repaid over time.
– Bonds: Debt securities issued by companies or governments that investors can purchase, with the issuer agreeing to pay back the principal along with interest.
– Lines of Credit: Flexible borrowing options that allow businesses to draw funds as needed, up to a specified limit, and pay interest only on the amount used.
– Commercial Mortgages: Loans secured by real estate, typically used to purchase or refinance commercial properties.
– Equipment Financing: Loans specifically for purchasing equipment, where the equipment itself often serves as collateral for the loan.