Debt Financing
BusinessGlossary term
Definition
A method of raising capital by borrowing money that must be repaid over time with interest, typically through loans, lines of credit, or issuing bonds. Unlike equity financing, debt financing allows business owners to retain full ownership and control of their company. However, debt must be repaid regardless of business performance and increases the company's financial risk through required interest and principal payments.
Related terms
- Equity FinancingA method of raising capital by selling ownership shares (equity) in a company to investors in exchange for funding. Unlike debt financing, equity financing does not require repayment or interest payments, but it does dilute the existing owners' ownership percentage and control. Companies at various stages use equity financing, from startups selling shares to angel investors to established companies issuing stock through public offerings.
- Working CapitalThe difference between a company's current assets (cash, accounts receivable, inventory) and its current liabilities (accounts payable, short-term debts), representing the funds available for day-to-day operations. Positive working capital indicates that a business can cover its short-term obligations and invest in growth, while negative working capital may signal financial trouble. Managing working capital efficiently is critical for maintaining liquidity and ensuring smooth business operations.
- Cash Flow Statement (Business)A financial statement that tracks the actual movement of cash in and out of a business over a specific period, organized into operating, investing, and financing activities. Unlike the income statement, which includes non-cash items like depreciation, the cash flow statement shows whether a company is generating enough actual cash to fund operations and growth. Positive cash flow is essential for business survival, even for companies that appear profitable on paper.
- Business InsuranceA broad category of insurance policies designed to protect businesses from financial losses resulting from unexpected events such as lawsuits, property damage, employee injuries, and business interruptions. Common types include general liability insurance, professional liability insurance, workers' compensation, and commercial property insurance. Having adequate business insurance is essential for protecting your company's assets and is often required by law, lenders, or clients.
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