What does 'debt financing' entail?

Debt financing refers to the process of borrowing money that must be repaid over time, typically with interest. This form of financing is crucial for businesses as it allows them to access capital without relinquishing ownership stakes. When a company engages in debt financing, it usually does so by issuing bonds or taking loans from financial institutions.

The essential aspect of this strategy is the obligation to repay the borrowed amount along with interest, which represents the cost of borrowing. This structure enables businesses to leverage external funds for expansion, operational costs, or other investments, with the expectation that future revenues will exceed the cost of the debt.

In contrast to the other options, which involve either utilizing personal savings, purchasing equity shares, or issuing more equity, debt financing is specifically centered on the concept of borrowing with a commitment to future repayment. This characteristic distinctly defines it within the broader context of financing strategies used by companies.