Debt Financing a Cheaper Source of Finance (6 Solution)

Debt financing refers to the practice of borrowing money from external sources, such as banks or financial institutions, to finance business activities or investments. Compared to equity financing, where companies raise capital by selling shares of ownership to investors, debt financing is generally considered a cheaper source of finance.

This is because the cost of debt is usually lower than the cost of equity, as debt providers expect to receive a fixed rate of return on their investment, while equity investors typically expect a higher rate of return due to the higher risk involved. In this way, companies can benefit from the advantages of debt financing, such as lower costs and tax benefits, while also managing their debt levels to avoid financial distress.