What and How Does Debt Financing Work?

I recently wrote an article on margin loans, and this is an extension of that article. So, check that article whenever you get the chance if you want to know about margin loans. I wanted to write this article on a very similar topic, Debt Financing! So, what and how does debt financing work? With this article, I will provide a brief overview of what it is, how it works and who does it, and when. As always this is just the beginning. I am not looking to make you a pro at debt financing but to make you more familiar with it.

What is Debt Financing?

Debt financing is often confused with margin loans and equity financing. But, they are vastly different. First of all, margin loans are more related to individuals than corporations. Second, equity financing is a way to raise money and you don’t have to pay it back. Finally, debt financing is when a company sells bonds, bills or notes to raise funding. If you are not aware if you sell bonds, bills or notes you have to pay them back at a fixed time period.

How does Debt Financing Work?

Debt Financing works like a loan to the lender. In the form of bonds, notes and bills. When you hear the term corporate bonds, or junk bonds, they are referring to debt financing. It is a loan by the company for a fixed period of time for a field yield over that specified time. Companies do this to provide them a much easier entry into raising money rather than going to the bank or issuing additional stock.

Who utilizes Debt Financing and When?

Typically, most companies utilize debt financing. Companies, like Walmart, Microsoft, and even Apple! These companies do this because it is a way to diversify raising funds for their business. It’s as simple as that! It seriously is though, so I wouldn’t try to read to much into it. Unless, you are in the process of having to utilize debt financing.

Takeaway

As I mentioned at the beginning of this article, this is meant to be an introduction. I encourage you to continue to learn and expand your mind. Understanding, the ins, and outs of finance is the key to everlasting wealth and happiness. I hope this was helpful! Keep learning!

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