Debt is borrowed money, either between people, businesses, or banks, as well as a financial instrument used as leverage by corporations to borrow or purchase.

Frequently Asked Questions
  • What has an impact on a company’s net interest margin?

    Multiple factors may affect a financial institution's net interest margin: chief among them, supply and demand. If there's a large demand for savings accounts compared to loans, net interest margin decreases, as the bank is required to pay out more interest than it receives. Conversely, if there's a higher demand in loans versus savings accounts, where more consumers are borrowing than saving, a bank's net interest margin increases.

  • How much debt can a company safely take on?

     If a company has no debt at all, then taking on some debt could give the company more opportunity to reinvest in its operations. Typically, though, too much debt is bad for companies and shareholders because it inhibits a company's ability to create a cash surplus. However, high debt levels may negatively affect common stockholders, who are last in line for claiming payback from a company that becomes insolvent.

  • What is an AA+ rating?

    Considered one of the rankings for investment-grade debt, investments rated by ratings agency Standard & Poor’s (S&P) with an AA+ rating have a strong likelihood of repaying their debts, making the chance of default very low. The firm creates its ratings based on information such as annual reports, news articles, and company management.

  • Why would a company choose debt over equity financing?

    In order not to have to surrender any part of its company, a firm can choose debt financing over equity financing. Sources of debt financing include term loans, business lines of credit, invoice factoring, business credit cards, SBA loans, and personal loans, usually from a family member or friend. A company that believes in its financials would not want to miss on the profits they would have to pass to shareholders if they assigned someone else equity.

  • How is mezzanine financing helpful to a company?

    Mezzanine financing can help a company support specific growth projects or acquisitions. The benefits for a company include the fact that the providers of mezzanine capital are often long-term investors in the company. Since traditional creditors generally view a company with long-term investors in a more favorable light and are then more likely to extend credit and favorable terms to that company, this could make it easier to obtain other types of financing.

  • What is meant by short/current long-term debt?

    Creditors as well as investors use this item to determine if a company can pay off its short-term obligations. The short/current long-term debt is a separate line item on a balance sheet account that outlines the total amount of debt that must be paid within the current year. The current liability account or short-term debt entry is for debt that is to be paid off within the next 12 months. There may also be a portion of long-term debt shown in the short-term debt account.

Key Terms

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