When Is It a Good Idea For a Company To Take On Debt? Question: When is it good for a company to issue debt? — Submitted by ?@JuniorBurgos Answer: Finance can seem like a dizzyingly complex discipline full of dense concepts and esoteric jargon. But the field is founded upon — and mostly consists of — a few simple concepts. One example is that there are basically two ways to fund a business, assuming the owner doesn’t have enough money on hand: By selling ownership stakes in the company (otherwise known as equity), or by taking out debt. So how does a company decide whether to fund itself with equity or debt? Big-name CFOs get paid tons of money to make that determination, and each industry and company is different, but each form of financing generally has its own pros and cons. When you take out debt — whether by borrowing money from a bank or issuing bonds to the public — there are three clear results: 1) You’ll owe the lender or lenders a fixed amount of money at predetermined dates; 2) your interest expenses are tax deductible; and 3) you’ll give up no control over the actual management of the firm. On the other hand, if you choose to raise money instead by selling an ownership stake in the company, 1) you’ll only owe your investors money if you realize a profit, but the amount you end up paying them may be huge; 2) these dividend payments to investors are not tax deductible; and 3) your investors will likely have a say in how the company is managed. Here you can see the appeal of debt over equity. If you expect your company to be successful, and you don’t like the idea of sharing control with other investors, debt is obviously the best way to go. The downside is that if your company isn’t successful, you still have to make those debt payments. And if you can’t, lenders will be first in line in a bankruptcy proceeding to collect what is owed them. So are certain companies more apt to use debt or
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