Funded Debt
Funded debt is a company's debt that matures in more than one year or one business cycle. This type of debt is classified as such because it is funded by interest payments made by the borrowing firm over the term of the loan.Funded debt is also called long-term debt since the term exceeds 12 months. It is different from equity financing, where companies sell stock to investors to raise capital.
Financing Debt
Definition: Financing debt refers to company debt with a maturity date exceeding one year or one business cycle. This type of debt is classified as financing debt because it is financed through interest payments over the loan period by the borrowing company. Financing debt is also known as long-term debt because its term exceeds 12 months. It differs from equity financing, where a company raises capital by selling shares to investors.
Origin
The concept of financing debt originated from the need for companies to secure long-term funds to support their expansion and operations. As early as the 19th century, with the advancement of the Industrial Revolution, companies began issuing bonds and obtaining long-term loans to raise funds. This method gradually evolved into the modern form of financing debt.
Categories and Characteristics
Financing debt mainly falls into the following categories:
- Corporate Bonds: Bonds issued by companies, typically with fixed interest payments and a maturity date.
- Long-term Loans: Loans provided by banks or other financial institutions with a term exceeding one year.
- Lease Financing: Obtaining long-term use rights of equipment or assets through leasing, similar to a loan.
The common characteristics of these financing methods include regular interest payments and principal repayment at maturity. Their advantages include the ability to obtain large amounts of funds without diluting shareholder equity, but the downside is the obligation to make fixed interest payments.
Specific Cases
Case 1: A manufacturing company needs to expand its production line, requiring 50 million yuan in funds. The company decides to raise this amount by issuing corporate bonds with a 10-year term and an annual interest rate of 5%. This way, the company can obtain the necessary funds without diluting shareholder equity.
Case 2: A tech company needs to purchase a batch of expensive server equipment with an expected lifespan of 5 years. The company opts for lease financing to acquire the equipment, paying annual rent. This allows the company to obtain the necessary equipment without making a large upfront payment and choose to purchase or return the equipment at the end of the lease term.
Common Questions
Q: How does financing debt differ from equity financing?
A: Financing debt requires regular interest payments and principal repayment at maturity, whereas equity financing raises funds by selling company shares, which does not require principal repayment but dilutes existing shareholders' equity.
Q: What should a company consider when choosing financing debt?
A: A company should assess its cash flow situation to ensure it can make timely interest payments and repay the principal. Additionally, it should consider the cost of financing and changes in market interest rates.
