What is Funded Debt?
606 reads · Last updated: December 5, 2024
Funded debt is a company's debt that matures in more than one year or one business cycle. This type of debt is classified as such because it is funded by interest payments made by the borrowing firm over the term of the loan.Funded debt is also called long-term debt since the term exceeds 12 months. It is different from equity financing, where companies sell stock to investors to raise capital.
Definition
Financing debt refers to company debt with a maturity date exceeding one year or one business cycle. It is classified as financing debt because the borrowing company finances it through interest payments over the loan period. Financing debt is also known as long-term debt because its term exceeds 12 months. It differs from equity financing, where a company raises capital by selling shares to investors.
Origin
The concept of financing debt evolved with the development of modern financial markets. Early companies primarily relied on shareholder capital, but as businesses grew and capital needs increased, long-term borrowing became an important financing method. In the early 20th century, with the growth of the banking industry, companies began to widely use long-term debt to support their expansion and operations.
Categories and Features
Financing debt can be categorized into various types, including bank loans, corporate bonds, and lease debt. Bank loans are often the most common form of financing for businesses, offering flexible repayment terms and interest rates. Corporate bonds involve companies borrowing from the public by issuing bonds, usually at lower interest rates but with issuance costs. Lease debt allows companies to obtain long-term use of equipment or property, reducing initial capital expenditure.
Case Studies
A typical example is Apple Inc.'s issuance of $17 billion in bonds in 2013, which was the largest corporate bond issuance at the time. Apple used these funds for stock buybacks and dividend payments, demonstrating how financing debt can optimize capital structure. Another example is Tesla Inc., which has issued bonds multiple times to raise funds for new factories and R&D projects, highlighting the importance of financing debt in rapid expansion.
Common Issues
Common issues investors face with financing debt include interest rate risk and insufficient debt repayment capacity. Rising interest rates can increase debt costs, and if a company's cash flow is inadequate, it may face difficulties in repaying debt. Additionally, over-reliance on debt financing can lead to high financial leverage, increasing financial risk.
