Debt refers to the borrowing of goods, services and money. Although the word debt can spark fear in many people, it is often seen as a sign of the health of the economy. Many companies look at debt as a financial tool to fund their investments and ventures.

When there is a requirement to raise capital, debt financing is a great option. Debt financing involves borrowing money and repaying it with added interest in regular intervals. Today, many companies opt for debt financing as a part of their corporate finance strategy. However, debt financing does not imply lack of funds or failure. In fact it is a financial strategy that helps to minimise the capital cost of a firm and maximises its value.

Generally, the cost of assets of a firm is the total of the cost of debt and the cost of equity. When compared to equity issuance, the expenditure raising funds and the yearly returns that are required to lure an investor are considerably less in debt financing. Equity involves giving up a fraction of the firm’s ownership, while debts do not.

Debt financing is also preferred because of the tax benefits that a company can enjoy.

Due to these advantages, debt financing is an excellent way of boosting a firm’s value and minimising capital costs.