Debt Financing in General

A company’s debt financing usually consists of monetary loans and other debts. Loans are in most cases subject to interest, and repaid to the creditor in accordance with the loan terms. When selecting the form of financing, the main criteria to be considered include availability of the financing, duration of the need for financing, alternatives for payment of installments and interest, as well as the price of money in the different options. In most forms of debt financing, the company is required to provide security before credit can be granted.

Short-term debt means liabilities, which will be due within the next twelve months, or which are overdue. Short-term debt includes e.g. accounts payable, overdraft facilities, deferred taxes and payments to public authorities.

Long-term debt becomes due after more than one year. Long-term debt includes e.g. loans granted by banks and finance companies, reborrowing of pension contributions, and other loans granted by insurance companies.

Investors of debt financing do not normally have any decision-making power in the company. However, in the event of bankruptcy or insolvency, debt financiers, i.e. the creditors, have substantial power to make decisions. This provides protection for the investors’ funds. As regards distribution of funds in a bankruptcy situation, the debt financiers also have higher priority compared to the company’s shareholders and mezzanine financiers. The order of priority between the creditors depends, among others, on the collateral for the debt.