Debt Financing is a method of raising capital where a business borrows money from lenders such as banks or financial institutions, with the obligation to repay the principal amount along with interest over a specified period.
How It Works:
- A business applies for a loan or credit facility.
- The lender evaluates creditworthiness and approves the loan.
- Funds are disbursed to the business.
- The business repays the loan in installments or as agreed.
- Interest is paid along with the principal over the loan tenure.
Benefits:
- Enables business expansion without diluting ownership
- Provides a predictable repayment structure
- Interest payments may offer tax benefits
- Helps meet working capital or capital expenditure needs
Example:
A company takes a loan of ₹50,00,000 from a bank to purchase machinery and repays it over 5 years with interest.