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Debt capital is capital, usually cash, raised by issuing bonds. While most of the time the capital raised is cash, it can also be other valuables. The capital obtained 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 businesses is to sell a product or service at a profit. However, some may need or want to raise cash faster than the normal course of buying and selling can provide. To do this, they may consider debt capital.
In some ways, this type of capital can be more attractive to a company than another way of raising money, such as additional stock issuance. Companies may not want to issue more shares because that would dilute ownership of existing shares. Issuing more shares also risks lowering the share price, depending on how much is issued.
Investors may also find providing debt capital through the purchase of bonds an attractive option. While the option does not provide any equity interest in the company, it does offer a bit more security than stock. Bonus payments take precedence over dividend payments received by shareholders. If the company earns enough to cover its debt capital obligations, it is the shareholders who do not receive any payment. As with most other forms of debt, bonds are paid back with interest.
This type of capital is usually obtained 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.
In some cases, debt principal can be used to pay down debt principal that is already outstanding by issuing more bonds to pay off the first set of bonds. This is called “calling loops”. This usually means that the original bonds issued are 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 equity is typically issued after consultation with a securities attorney, who determines a number of different factors, including how best to sell the securities. Securities may be sold through negotiation with an underwriter or through a bidding process. In some cases, especially for governments, bonds may only be allowed for certain projects. Securities attorneys will advise government administrators on all legal matters.