Debt Capital
All businesses require money in the form of capital to perform well . It is not always possible for a businessman to raise capital by himself or with the help of his partners alone. At such times, capital is raised by taking loans . This kind of a loan raised by a business is called as debt capital. This loan is to be repaid at some future date that is mutually consented to and decided by the business owners and the creditors.
The subscribers of the debt capital do not become owners of the business . They only remain creditors to the business. These creditors receive a fixed annual percentage return on their loan . This form of capital is also raised through the issuance of bonds. Raising debt capital is not a short process and requires adequate planning. This may be done by the business owners themselves or can be done through a capital finance company .
How debt capital is raised?
Debt capital can be in the form of vanilla financings for new business enterprises or for businesses that are already performing. Debt capital differs from equity or share capital . Also debt capital is said to rank higher than equity capital . This means that repayment of debt capital annual returns is given more priority than equity capital. Also, it is compulsory for a business to pay the interest on debt capital first and than pay dividends to any suppliers of equity capital . The subscribers are issued bonds, in order to raise capital for the company or business .
The fixed annual percentage return on the loan raised through the bonds is called as coupon rate . Coupon rate is the sum assured per pound or dollar depending upon the face value of the bond . This means the company promises to pay a certain percentage of the value of the bond to the subscriber at the end of the year for using his money . The interest rate is stated as a percentage on the bond and is also known as coupon yield . Local newspapers and business magazines carry advertisements and notices by business for issuing of bonds. Subscribers must apply for the same within the specified time limit .
Importance of debt capital
Debt capital plays a very important role in any business. It is not always possible for a business to raise huge amounts of money through profits or through its owners equity capital. Debt capital acquired through subscribers and creditors is used by the business for its transactions . Debt includes all short term and long term obligations of a business . Debt capital is borrowed with a promise to repay at a future date . While the business uses the creditors money, it pays them annual returns. This is advantageous to both the business as well as the creditors. The business gets to use the money over a longer period of time without worrying about liabilities and the creditors get annual returns on the money that they have provided for the business . However, it is always recommended that the debt-to-equity ratio of the business must be well balanced in order to present a favorable picture of the financial structure of the business .
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