Corporate Debt
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.
Corporate Debt
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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.
Learn More: Net Interest Margin Definition -
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.
Learn More: Will Corporate Debt Drag Your Stock Down? -
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.
Learn More: What Do AA+ and AAA Credit Ratings Mean? -
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.
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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.
Learn More: How Are Mezzanine Loans Structured? -
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.
Learn More: What Is the Short/Current Long-Term Debt?
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Surety
A surety is a person or party that takes responsibility for the debt, default, or other financial responsibilities of another party. Often used in contracts where one party's financial holdings or well-being are in question and the other party wants a guarantor, surety bonds are financial instruments that tie the principal, the obligee—often a government entity—and the surety.
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Defeasance
The term defeasance in a contract is a provision that voids a bond or loan on a balance sheet when the borrower sets aside cash or bonds sufficient enough to service the debt. Since the borrower has set aside cash to pay off the bonds, the outstanding debt and cash offset each other on the balance sheet and do not need to be recorded.
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Secured Debt
Secured debt is debt that is backed by collateral to reduce the risk associated with lending. If a borrower should default on their loan repayment, a bank can seize and sell the collateral, and use the proceeds to repay the debt. Loans backed by collateral, or secured, are considered less risky than loans that are unsecured.
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Debt Overhang
The term debt overhang describes a debt burden so large that an entity cannot take on additional debt to finance future projects. The size of the burden is so large that all earnings go to paying off existing debt instead of funding new investment projects, which makes the potential for defaulting higher. Debt overhangs can lead to underinvestment, which stunts growth and makes recovery more difficult.
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Paydown
A paydown means a reduction in the principal amount left on a loan or other debt. When companies achieve a paydown, they do it by issuing a new round of debt that is smaller than a previous round that has reached maturity. Consumers, too, can achieve a paydown by paying more than the minimum amount due on a regular debt, such as a mortgage.
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Working Capital Loan
A working capital loan is used to finance a company's everyday operations, rather than long-term assets or investments. Instead, they provide working capital to cover short-term operational needs. Businesses with high seasonality or cyclical sales may rely on working capital loans to help with periods of reduced business activity.
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Lien
A lien is a claim or legal right against assets that are usually used as collateral to satisfy a debt. Three common types of liens are bank, real estate, and tax. The creditor may be able to seize the asset that is the subject of the lien. If a contract on a property is not paid, the lender has a legal right to seize and sell the property.
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