Debt Financing

Definition

Debt financing refers to the method by which businesses or individuals raise funds through borrowing. This type of financing typically includes issuing bonds, taking loans, or other forms of borrowing. Through debt financing, the borrower commits to repaying the principal and paying interest at a specified future date.

Origin

The history of debt financing dates back to ancient times when merchants and governments borrowed to fund trade and wars. With the development of financial markets, the forms of debt financing have become more diverse and complex, especially during the 19th-century Industrial Revolution when companies began to use bonds and bank loans extensively to support expansion.

Categories and Features

Debt financing is mainly divided into short-term and long-term categories. Short-term debt is typically used to meet a company's working capital needs, such as commercial paper and bank overdrafts. Long-term debt includes corporate bonds and long-term loans, usually for capital expenditures and expansion projects. The characteristic of debt financing is that the borrower must pay fixed interest and repay the principal at maturity, making financial planning crucial.

Case Studies

A typical case is Apple Inc.'s issuance of $17 billion in bonds in 2013, which was the largest corporate bond issuance at the time. Apple used these funds for stock buybacks and dividend payments instead of using its overseas cash reserves. Another example is Tesla Inc., which raised funds through convertible bond issuance to support its electric vehicle production and R&D projects.

Common Issues

Common issues investors face when using debt financing include interest rate risk and insufficient repayment capacity. Rising interest rates can increase borrowing costs, and if a company's cash flow is insufficient to cover interest and principal repayments, it may face default risk.