Financial Glossary
Debt capital
Debt capital is funding obtained by a business through borrowing -- via bank loans, lines of credit, bonds, SBA loans, equipment financing, or seller notes -- that must be repaid over time with interest. Unlike equity capital, debt does not dilute ownership but creates fixed repayment obligations regardless of business performance. The cost of debt is the interest rate, which is tax-deductible in most jurisdictions, making debt cheaper than equity on an after-tax basis for profitable companies. Leverage ratios such as Debt / EBITDA and Debt Service Coverage Ratio (DSCR = Net Operating Income / Total Debt Service) are used by lenders to assess repayment capacity.
Problem & Application
A campground operator generating $400,000 in annual EBITDA is evaluating whether to finance a $600,000 amenity expansion with debt or equity. A bank offers a seven-year term loan at 7% interest, resulting in annual debt service of approximately $111,000. The resulting DSCR is $400,000 / $111,000 = 3.6x -- comfortably above most lenders' minimum threshold of 1.25x -- suggesting the business can support the debt without liquidity strain. Because interest is tax-deductible, the effective after-tax cost of the loan at a 25% tax rate is approximately 5.25%. Bringing in an equity partner to fund the same expansion would avoid the repayment obligation but would permanently cede a share of future profits. For a profitable, cash-generative campground, debt capital is often the lower-cost and less dilutive financing path.
In Short
Debt capital is a strategic financing tool, but businesses must manage repayment obligations and interest costs to maintain financial health.