What is debt capital?

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Debt capital is capital, usually cash, raised through the issuance of bonds. While most of the time the capital raised is cash, it can also be other valuables. The capital raised must be returned to the debtor. Both private companies and governments can raise debt capital in this way.

To raise capital, companies have several different options. Obviously, the goal of most companies is to sell a product or service at a profit. However, some may need or want to raise money faster than the normal course of buying and selling can provide. To do this, they can consider debt capital.

In some ways, this kind of capital can be more attractive to a company than another way to raise money, such as an additional issue of stock. Companies may not want to issue more shares because that would dilute ownership of existing shares. Issuing more shares also runs the risk of lowering the share price, depending on how much is issued.

Investors may also find that providing debt capital through bond purchases is an attractive option. While the option does not provide any equity interest in the company, it does offer a bit more security than shares. Bond payments take precedence over dividend payments, which shareholders receive. If the company earns just enough to cover its debt capital obligations, it is the shareholders who receive no payment. As with most other forms of debt, bonds are repaid with interest.

This type of capital is typically raised through the issuance of bonds, although there are other options as well. Businesses can also borrow from banks, which is a popular option for many small businesses. However, most larger companies see bonds as a more popular option for a number of reasons.

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In some cases, debt principal can be used to pay off debt principal that is already outstanding by issuing more bonds to pay off the first set of bonds. This is called “calling the loops”. Typically, this means that the original bonds issued are being paid off before the term expires. Companies or governments may choose to do this because interest rates are more advantageous at some other point in the life of the bonds.

Debt capital is usually issued after consultation with a securities attorney, who determines a number of different factors, including how best to sell the securities. Securities can be sold through negotiation with an underwriter or through a bidding process. In some cases, especially for governments, bonds may only be allowed to be issued for certain projects. Securities attorneys will advise government administrators on all legal matters.

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