How Companies Manage the Risk Structure of Debt

Managing debt in business is similar to personal debt management, although on a much grander scale. Companies may employ people who are specifically responsible for debt management. The implementation of policies or procedures can help companies set standards to achieve financial goals.

Use

Companies typically use debt financing to pay for different types of business activities. Using debt allows the company to retain revenue generated from business operations. Business owners and managers will typically shop banks to find the best loan available in terms of interest rate and term length.

Function

Managing debt often includes using a mix of equity financing in addition to bank loans. Equity financing includes investments from venture capitalists or private individuals. Terms for this financing may be more favorable than traditional bank loans.

Considerations

Rather than using debt to finance business growth, companies may decide to use cash from business operations. While this will often result in slower growth, it avoids creating too much leverage that demands large cash repayments regardless of future cash flows.

References

• Small Business Administration: Understanding the Basics
• Reference for Business: Capital Structure