Debt is the amount of money that is owed by the debtor or borrower to the creditor or lender. The borrower can be an individual, company, or government. The creditor can be a credit card, payday loan, an individual, or a business. The debt involves contractual terms regarding the time as well as the amount of money for repayment(McFarlane, 2013). The principle, as well as the interest, are among the things that these two parties, the creditor, and the borrower, agree on. In this paper, I will discuss debt financing.
In my opinion use of debt can be useful or burdensome. People or organizations can borrow money for different reasons. When an individual borrows money for activities such as paying rent, education fees, investing in a business, repairing a house, medical bills or emergence is reasonable (McFarlane, 2013). However, when debts are used in luxury activities like buying expensive meals, trips, clothing or other unnecessary things, this debt can turn to be burdensome. Therefore, it is vital to use debt in reasonable activities to avoid making financial mistakes (Langabeer & Helton, 2015).
An organization can use debt to finance its investment opportunities when this debt aids in lowering the overall financing cost and enables profit retention. Some investment opportunities require an amount of money that an organization may not afford (Langabeer & Helton, 2015). Taking a debt can aid an organization in investing in this opportunity, and the organization can retain the profit. However, the company must be able to pay the principal amount and the interest at the agreed time.
Although, when borrowing money to manage another debt payment is entirely considered ill-advised.
An organization can be overzealous and get many debts. When an organization does not work hard to offset the debt, then it will need a new debt to continue with it is daily activities. When this organization is not getting enough profit, it May as well require a new debt to repay the first debt. As a result, an organization can be overzealous and get many debts (McFarlane, 2013).
Langabeer, J. R., & Helton, J. R. (2015). Health care operations management. Jones & Bartlett Publishers.
McFarlane, A. (2013). Refinancing Hospital Loans. Cityscape, 273–282.