‘A small debt produces a debtor; a large one, an enemy.’
Publilius Syrus, former slave, writer
Companies raise finance in one of two ways: debt or equity. Debt finance involves borrowing money that has to be repaid, plus interest.
Debt finance is money raised from debtholders (banks, finance houses, individuals, etc.). Debtholders lend money in return for repayment of the original amount borrowed (the principal) plus interest at an agreed rate and time in the future.
Debt finance is typically a cheaper form of finance for a company than equity. This is because:
Debt provides a contractual and certain return for debt holders, unlike equity which has no guarantee of return.