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Debt Capital

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Debt capital is funds supplied by lenders that is part of a firm's capital structure. Debt capital usually refers to long-term capital, specifically bonds, rather than short-term loans to be paid off within one year. If the short-term debt is continually rolled over, however, it can be considered relatively permanent and thus debt capital. Debt capital has advantages and disadvantages over equity, the other component of a company's capital structure. The regular interest payments for debt capital represent a cost of doing business and, unlike dividends, are tax deductible. Debt capital also enables the firm to expand its profits indefinitely, provided it can make a greater return on the debt capital than the costs of servicing it. However, unlike dividends, interest payments to bondholders must be met on time and in full. Furthermore, as debt becomes a greater part of the firm's capital structure, a downturn in business threatens the company's survival, as the costs of servicing debt capital mount. Financial analysts thus spend much effort trying to determine the best proportion of debt capital in a company's capital structure.



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