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Debt Capital Funding

Debt is one instrument that can be used to fund a company. The lender provides cash to the company in exchange for promised interest payments at regular intervals and repayment of the principal amount at the time of maturity. With debt, there is a steady outflow of cash through interest payments, which can create problems for a startup that generally needs cash to reinvest back into the company to support growth. With the issuance of debt, however, a company does not give up a portion of ownership or control. In the case of a default, the debt holders will be paid back before the owners receive any form of payment.

Debt also has the advantage of having a tax shield on interest payments. This means that interest expenses are tax deductible. Typically a startup will not yet be profitable, so this benefit does not have a positive effect until profitability is reached.

in Capital Sources for Startups