7

Debt Financing

INTRODUCTION

Bill Gates has a rule that Microsoft, rather than incurring debt, must always have enough money in the bank to run for a year with no revenues.1 In 2013, Microsoft had $77 billion in cash on its balance sheet.2 Unfortunately, 99.9% of entrepreneurs will never be able to emulate this financing plan. Therefore, they must be willing to pursue and accept debt financing.

Debt is money provided in exchange for the owner’s word (sometimes backed up by tangible assets as collateral as well as the personal guarantees of the owner) that the original investment plus interest at a predetermined fixed or variable rate will be repaid in its entirety over a set period of time.

As we saw in Chapter 6, banks have been by far the ...

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