1. Explain and provide an example :

• DEBT FINANCING - occurs when a firm raises money for working capital or capital expenditures by selling debt instruments to individuals and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid. The other way to raise capital in debt markets is to issue shares of stock in a public offering; this is called equity financing.

2. EXPLAIN THE USE OF DEBT FINANCING :

• Proper use of debt financing is the potential for enhanced return on assets (ROA). For instance, assume that a business holds large amounts of cash balances instead of using a line of credit to assist in the financing of current assets like accounts receivable and inventory.

3. EXPLAIN THE ADVANTAGES AND DISADVANTAGES OF DEBT FINANCING

• ADVANTAGES
  • Debt financing allows a business to leverage a small amount of capital to create growth.
  • Debt payments are generally tax deductible
  • A company retains all ownership control
• DISADVANTAGES
  • Interest must be paid to lenders
  • Payments on debt must be made regardless of business revenue
  • Debt financing can be risky for businesses with inconsistent cash flow.

4. EXPLAIN AND PROVIDE AN EXAMPLE OF THE FOLLOWING:

• Installment loans have set repayment terms and monthly payments. The loan amount is received as a lump sum payment upfront. These loans can be secured or unsecured.
• Revolving loans provide access to an ongoing line of credit that a borrower can use, repay, and repeat. Credit cards are an example of revolving loans
• Cash flow loans provide a lumpsum payment from the lender. Payments on the loan are made as the borrower earns the revenue used to secure the loan. Merchant cash advances and invoice financing are examples of cash flow loans.

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