Debt financing. In this mode money is borrowed, and usually the borrower (debtor) gives the lender (creditor) a promisory note. This, usually, obligated the debtor to pay back a certain defined amount at a particular and defined time in the future.
Forms of debt financing can include credit cards, mortgages, signature loans, bonds, IOUs, and HELOCs (Home Equity Lines of Credit) as examples. Treasury debt, savings bonds, corporate bonds are also forms of debt financing.
With debt financing, the creditor's return is fixed and understandable. It is, quite simply, the agreed upon interest rate for the debt. This rate can vary from a single digit rate to 25% or perhaps even 30% depending on the debtor. Risk is determined by a handful of factors the most significant usually being one's credit history. The protective claim offered to creditors in debt financing is a claim on the debtor's assets. Should the debtor fail to repay, the creditor may forcibly take possession of other debtor property and sell it, using the money to offset the loss of the loan. The claim of creditors takes priority over the claim of those who participate in equity financing.
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