When should a company raise funds using debt?



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When should a company raise funds using debt?

3 Answer(s)


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The most fundamental element to remember about a debt is that if a company raises money using debt it will have to pay a yearly or biannual interest expense to the lender. If a company is in its early stage, then every dollar is precious to the company and paying money through interest expense is not a wise idea, since that money could be reinvested into the product of the company so that it can quickly be competitioned.

In situations like that raising money using debt is not advisable and hence raising money using equity is advisable. In cases of later stage companies there are in the growth phase which have predictable history and have clarity on what future strategy they want to implement. Companies such as this can raise money using debt because the company is significantly cash flow positive and the incremental interest expense will not affect the company so much.

Plus since the company is already a large company there is no need for the current promoters, founders or the investors to dilute in the stake of the company. Hence for larger more mature predictable companies raising money using debt is a right thing to do.

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Speaking from Financial Decision Point of View,it is always Prefered to have a Debt-Equity Mix in the Company.

Companies which have high amount of Equity should go with Debt in order to increase the allover performance of the company like it can Reduce the Tax Burden Interest payable is always subject to tax for a Company.Secondly,In order to maintain Trading on Equity.

It Also Depends on the Companies Leverage Ratios like Opearting Leverage,Financial leverage etc which decide what is better to raise funds for a company


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A growing number of companies are turning to debt to raise capital, taking advantage of the thawing credit markets to build their war chests in anticipation of a wave of deal-making.
he decision to take on debt breaks from tradition in tech, where companies have typically preferred to raise money by selling stock. Debt has become a more attractive fundraising option largely because interest rates are low.
Turning to debt is an especially big change for software companies, which typically generate lots of cash and aren't saddled with large one-time expenses like opening a factory.
Companies increasingly have to decide whether they are predator or prey and taking on debt "is a good way to signal your intentions" to be an acquirer