What is Debt Financing? Definition

Debt financing is a method of funding a business, and involves borrowing money from another entity.

This could be money that is needed for a startup, or for operational capital for an existing business. The most common form of debt financing is when a company approaches a bank and takes out a loan in order to fund their business.

Debt financing is one of the two primary ways of funding a business. The other is equity financing. The difference between the two is that equity financing involves brining partners into the business. A business owner sells them a percentage of the business in return for their infusion of capital. This is not a loan, so it does not need to be repaid, but debt refinancing does.

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What is Debt Financing? Additional Overview

Debt financing can also refer to the issuance of bonds by a company. A bond is a debt instrument, and a corporate bond is essentially a corporation asking for investors to lend it money in return for interest.

Selling shares in a company instead of bonds, would be a form of equity financing instead.

Financing a new business using debt typically requires good credit, a solid business plan, or some sort of asset which the bank can use as collateral. These provide assurances to the bank that the loan will be repaid. 

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