Debt Financing or Borrowed Funds

A borrowed funds or debt financing is the combination of the funds raised by the way of credit or loans. It is the proceeds of an organization to raise the operating or other capital by borrowing. Most frequently, this may be achieved through issuance of a debenture, bond or many other kind of debt security. In substitute for providing the money, bond or debenture, owners become creditors of the organization. They are permitted to the amount of interest and are required to transfer their loan at the end of a given time period.

Debt financing can be short-term or long-term. Short-term debt financing consists of debt securities with shorter deliverance time periods and it is used to offer day-to-day provisions; for example payroll and inventory etc. On the other hand, Long-term debt financing generally engages a firm to acquire or buy the fundamental necessities for its business, for instance major assets and facilities. Debt financing is generally known as borrowed capital. The collection of borrowed funds depends upon different types of business organizations which are given as:

 

Organization Form	Funds Borrowed
Sole Proprietorship	Funds are raised by the owners by giving the personal security or giving the security of their existing assets.
Partnership Firm	Here funds are raised by partner by giving the personal security or the security of existing assets.
Company	Loans are raised by issuing debentures through credit or loans.

 

 

Characteristics of Debt Financing or Borrowed Capital

1.  Fixed obligations: Debt financing has the following two fixed obligations which are given as:

1. Interests amount is payable at yearly are half yearly interval. It is payable as a charge against the earnings irrespective of the fact whether there are losses or profit.
2. The principle capital is payable as termed.

2.  No right of control over management

Creditors and lenders usually do not have any right of control over the borrowed organization’s management.