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 business. The debt involves contractual terms regarding the time as well as the amount of money of repayment(McFarlane, 2013) . The principle, as well as the interest, are among the things that these two parties, creditor, and the borrower, agree. In this paper, I will discuss debt financing.
In my opinion use of debt can be useful or burdensome. People or organization 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, trip, 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 in the agreed time.
Although, when borrowing money to manage another debt payment is entirely considered as ill-advised.
An organization can be overzealous and get much 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 much 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.