What is Debt Financing?

When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.

Debt financing is basically money that you borrow to run your business. If bankruptcy occurs, the bond or debenture holders are considered creditors and must be paid back by the companies remaining assets. This is a way for companies to raise capital without having to use their assets or give up ownership in their company. This leaves their assets free to do other things to generate capital for the business.