Capital & Financing

Debt Financing

Learn debt financing, the cheapest and non-dilutive outside capital, and why its fixed repayment is both its power (leverage) and its danger (it must be paid in a downturn).

  • Intermediate
  • 13 min total
  • 13 chapters

What decision this helps you make: Whether to fund with debt, and how much a business can safely borrow given its cash-flow stability.

What this topic is

Debt financing is raising money by borrowing (a loan, line of credit, or bond) repaid with interest on a schedule. It's usually the cheapest outside capital and doesn't dilute ownership, but it carries a fixed repayment obligation that must be met regardless of how the business does.

Why it matters

That fixed payment is leverage: it magnifies both good and bad outcomes. In good times it boosts returns on your equity; in a downturn, the same payments must be met out of shrinking revenue, so it can push a viable business into insolvency.

Who should learn it

Anyone funding a business with borrowed money, or evaluating one that has.

What you will understand

  • Understand debt financing: borrowing, repaid with interest on a schedule
  • See its advantages: cheaper than equity, non-dilutive
  • Understand leverage: the fixed payment magnifies gains and losses
  • Borrow against downturn capacity, not just good-times cash flow

Prerequisites

Common misconception

"Debt is cheap and doesn't dilute me, so more debt is better." Debt is cheaper than equity and keeps your ownership, but its fixed repayment is a double-edged sword. That payment must be made regardless of how the business does, so debt is leverage: it magnifies good outcomes and bad ones. The fixed payment that boosts your returns in a boom is exactly what sinks businesses in a downturn. So borrow only what you can service in a bad month, not just a good one.